UPDATE 1-U.S. fiscal worries stir demand for German bonds
* Five-year German bond auction draws strong bids
* U.S. fiscal cliff worries make for conducive backdrop
* Recent yield rise makes current issue attractive
LONDON, Nov 28 (Reuters) - Investors bought 2.51 billion euros of five-year German debt on Wednesday at an auction that drew strong demand as a lack of progress in U.S. budget talks lifted appetite for safe-haven assets.
Combined with a recent rise in yields, the prospect of recession-inducing spending cuts and tax hikes in the United States kept appetite for low-risk German debt high, creating a conducive backdrop for the auction.
"It was a good auction. It was well-covered at a decent premium," said Artis Frankovics, strategist at Nomura in London.
"Today we had slightly risk-off sentiment because of the U.S. on concern over the fiscal cliff and that certainly helped demand."
The average yield at the sale was 0.41 percent, some 7 basis points above the lowest levels at which the benchmark bond changed hands in the market earlier this month.
Demand for German debt has been falling over the past seven trading days, pushing yields higher, as Greece edged towards, and finally secured, a deal to release aid funds.
However, for those investors who remain risk averse or need to hold high-quality, low-risk assets on their balance sheet, the rise in German yield encouraged buying at the auction.
"The recent 'sell-off' in the five-year segment since mid-November might have attracted demand from dealers who are betting on (there being) another leg (in) the rally in Bunds by year end," said Annalisa Piazza, market economist at Newedge.
Investors bid for 1.9 times the amount allotted, above the 1.5 times at the last sale, on Nov. 7, and an average of 1.7 time for the three previous sales of the bond.
The German authorities retained a below-average 16.4 percent of the 3 billion euros issued and will sell the remaining bonds into the secondary market over time.
The sale was the last of the October 2017 bond, adding a scarcity value which also contributed to demand.
Germany has raised over 98 percent of its targeted 184 billion euros for 2012, with a final bond sale due next week.