* Strong 5-year auction prompts buying
* Yields on 10-year notes fall to 2-week low
* 30-year yields fall to lowest since Dec. 8
* Spread between U.S., German bonds hits highest level on record (New throughout, adds data from 5-year auction, analyst quote)
By Dion Rabouin
Dec 28 (Reuters) - Benchmark U.S. Treasury yields fell to their lowest levels in two weeks on Wednesday after a well-bid 5-year note auction that primed an appetite for U.S. government debt.
The Treasury Department auctioned $34 billion of 5-year notes, which fetched a high yield of 2.057 percent, the highest since April 2011. The auction also yielded the highest bid-to-cover ratio since November 2014 and record high buying from indirect bidders.
Treasury yields fell precipitously after the auction, with benchmark 10-year Treasury note yields hitting their lowest since Dec. 14 and 30-year bond yields touching their lowest since Dec. 8.
An earlier 2.5-percent drop in U.S. pending home sales had set the table for yields to move lower, analysts said.
"We started off with pending home sales being kind of squishy, weak ... the effect was to start to cap the selloff in Treasuries," said Aaron Kohli, interest rate strategist at BMO Capital Markets. "It culminated with the buying at the auction, which then drove yields much, much lower."
The strong appetite for 5-year Treasuries at the auction was likely the catalyst for investor short covering, Kohli said, with 5-year notes having taken the brunt of the selloff in Treasuries that has unraveled since the election of Donald Trump as U.S. president.
"The market is being a bit too optimistic in terms of what can actually happen next year, and as a result has pushed up Treasury yields too much," Kohli said.
When investors sell Treasuries it lowers prices, which move inversely to yields.
The 10-year note was last up 14/32 in price to yield 2.51 percent. The 30-year yield was up 30/32 in price to yield 3.09 percent.
Prior to the selloff, worries in Europe about rescue plans for shaky Italian banks had driven the gap between benchmark U.S. 10-year notes and their German counterparts to the widest level on record.
The selloff in Treasuries tightened the yield spread, which had risen as investors bought safe-haven German Bunds in the first trading day there since the Christmas break. That pushed the gap between U.S. and German 10-year paper to a record wide 237 basis points as German 10-year yields fell to their lowest since Nov. 9. (Reporting by Dion Rabouin in New York; Editing by Dan Burns and Chizu Nomiyama)