UPDATE 1-U.S. sells 5-year notes at highest yield in nearly 2 years

Wed Jun 26, 2013 2:28pm EDT

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* Bid-to-cover ratio at auction lowest since September 2009

* Indirect five-year debt purchases highest since January 2010

* Direct purchases at auction lowest since November 2009

NEW YORK, June 26 (Reuters) - The U.S. Treasury Department on Wednesday sold $35 billion worth of new five-year debt at the highest yield in almost two years as investors held back due to worries about less Federal Reserve stimulus and quarter-end balance-sheet constraints.

Treasury yields have risen sharply since early May, reaching 22-month highs on Monday as investors dumped bonds after the Federal Reserve signaled it might trim its $85 billion monthly bond purchases later this year if the economy improves further.

The reluctance to buy Treasuries in this bearish climate was compounded by Wall Street firms that typically want to minimize their balance sheets and their inventories of bonds, stocks and other securities before the end of the quarter, analysts said.

The latest five-year auction followed a lightly bid two-year note sale on Tuesday, raising concerns about demand for the $29 billion in seven-year debt supply for sale on Thursday.

This five-year issue fetched a yield of 1.484 percent, the highest since July 2011 and half a basis point higher than traders had expected.

Overall demand for the supply was below average. The bid-to-cover ratio or the amount of bids versus the amount of debt offered, came in at 2.45, the lowest since September 2009.

Large fund companies, smaller bond dealers and other direct bidders bought 3.56 percent of the latest five-year offering, their smallest share since November 2009.

On the other hand, investors, foreign central banks and other indirect bidders who submitted their buying orders through primary dealers bought 52.99 percent at the auction, their biggest share since January 2010.

Primary dealers, or the 21 Wall Street firms who do business directly with the U.S. central bank, bought 43.45 percent of the latest five-year offering, their biggest share in four months, according to Treasury data.

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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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