* 30-year yield falls to 3-week low
* 5-year note yields lower after strong auction on Wednesday
* Investors buy bonds on last full trading day of the year
By Dion Rabouin
Dec 29 (Reuters) - U.S. Treasury yields fell to two-week lows on Thursday as buying picked up overnight, in tandem with European markets, ahead of a 7-year note auction on the last full trading day of the year.
Wednesday's strong auction of 5-year Treasury notes and weakness in U.S. equity markets was the catalyst for year-end bond buying on Thursday that pushed prices higher and yields down, analysts said.
"With stocks a little softer than people anticipated after the move yesterday, that opened the door for people to add just a few more Treasuries," said Jim Vogel, interest rate strategist at FTN Financial in Memphis. "But there's no big movement, there's no data people are reacting to."
Bonds retreated from early price gains ahead of the release of U.S. initial jobless claims. However, the data had minimal impact as Treasuries were little moved after the reading showed 265,000 Americans filed for unemployment benefits last week, largely matching expectations.
Benchmark 10-year Treasury yields fell to 2.466 percent, their lowest since Dec. 14. The 10-year note was last up 5/32 in price to yield 2.492 percent.
Yields on the 30-year bond fell to 3.089 percent, the lowest since Dec. 8. The long bond was last down 3/32 in price to yield 3.091 percent.
The yield on 5-year notes dropped more than 5 basis points to 1.964 percent.
The attractiveness of 5-year Treasuries was the result of investors realizing they "went overboard in selling" the notes, Vogel said. He noted that traders were still reticent to buy 30-year bonds because of inflation expectations heading into the new year.
"The two parts of the curve have been on widely different trajectories this month," he said. "So you've had this burst of intense selling concentrated in 30s that related to the steepening we've been seeing overseas for a while."
The Treasury Department will auction $28 billion of 7-year notes at 1 p.m. The bond market will close on Friday at 2 p.m. for the New Year holiday.
Investors are looking to a full slate of U.S. inflation, manufacturing and employment data in the coming week, culminating in the Jan. 6 release of the U.S. non-farm payrolls report. (Reporting by Dion Rabouin in New York; Editing by Dan Grebler)