* Banks scooped up 5-year, 7-year debt supply in March
* Dealer, broker purchases for these issues fell sharply
* Some analysts see a possible classification error (Adds Federal Reserve data in paragraphs 6-7)
NEW YORK, April 8 (Reuters) - Banks bought a record amount of Treasuries at auctions held by the U.S. government two weeks ago, despite market worries about whether the Federal Reserve might raise interest rates sooner than some traders had thought, according to Treasury data.
The Treasury awarded $4.976 billion of the $35 billion in five-year notes it offered to depository institutions and $4.550 billion of the $29 billion of seven-year debt it offered to this group of buyers, the data released late Monday showed. That comes to about 15 percent of the combined sales.
Analysts said the bank purchases of five-year and seven-year new Treasuries in March were unusual, and it was not clear what may have produced the sudden buying binge.
"It might be a fluke or a mistake," said Mary Beth Fisher, head of U.S. interest rate strategy at SG Corporate & Investment Banking in New York.
Other possibilities included one or a few banks buying for quarter-end portfolio rebalancing or capital requirements, analysts said.
Banks have steadily grown their Treasuries and agency securities holdings since last year, albeit not directly through auctions. Treasuries yields had risen, making them more profitable for banks to hold, analysts said.
Five-year and seven-year yields were 1.67 percent and 2.24 percent late on Tuesday, respectively. They were up about 1 percentage point from a year ago.
According to Federal Reserve data, commercial banks held $1.85 trillion in Treasuries and agency debt in the week ended March 26, up about $45 billion since the end of 2013. It was the highest level since February 2013.
A Treasury Department spokesperson said it does not comment on individual bidders in auctions.
Banks' demand for these debt maturities came at the expense of other major buyers.
For example, U.S. primary dealers, other commercial bank dealer departments, and other non-bank dealers and brokers, ended up with $10.376 billion of the five-year note supply offered in March, down from $15.419 billion in February.
Primary dealers are the 22 U.S. major bond dealers that do business directly with the Federal Reserve. Participating at U.S. Treasuries auctions is a key role of a primary dealer.
Fisher and a few other analysts speculated the sharp shift in the amounts of debt purchased between banks and dealers might stem from the Fed adding TD Securities as a primary dealer back on Feb. 11.
TD Securities is the U.S. broker-dealer arm of Canada's Toronto-Dominion Bank.
The Treasury might have classified TD's Treasuries five-year debt purchases in March as a bank instead of a dealer, according to these analysts.
This view, however, is weakened when one considers that TD was designated as a primary dealer prior to the February sales of five-year and seven-year debt whose results showed no unusual purchases between banks and dealers.
A TD Securities spokeswoman could not immediately be reached for comment.
In February, the depository institutions category of investors, which includes banks, savings and loan associations, credit unions, and commercial bank investment accounts, bought a combined $71 million of five-year and seven-year note supply - a bit more than one-tenth of a percent of the combined $65 billion sold.
Before March, the prior record on Treasuries auction purchases by banks occurred in March 2010 when they bought $2.569 billion in benchmark 10-year notes and $3.142 billion in 30-year bonds, according to data from the Treasury.
A week before the five-year and seven-year note sales, the Fed gave indications that it would end its massive bond-buying program this autumn. Fed Chair Janet Yellen, in a March 19 news conference following the meeting, said the Fed could start raising interest rates around six months later.
This sent the Treasuries market reeling and caused the five-year note to suffer its worst day since last July and the seven-year note to post its worst day since November, according to Reuters data. (Additional reporting by Jason Lange in Washington; Editing by Tom Brown and Lisa Shumaker)