U.S. Treasuries debt prices should stay firm into year-end, following a strong seven-year note auction on Wednesday, as investors square books ahead of year-end and prepare for Federal Reserve purchases next week.

Government debt prices rose on Wednesday as investors took advantage of the third-last trading day of the year to extend duration, offset short exposures and position for new Fed purchases.

Many investors used the $29 billion auction of seven-year notes to purchase Treasuries, helping the market add to gains. Wednesday's sale had the highest participation of indirect bidders since June 2009.

It went extraordinarily well, said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee. The seven-years captured everyone's imagination right here.

Bond purchases scheduled for next week as part of the Federal Reserve's $600 billion quantitative easing program may have been one factor that helped demand in the auction, said Igor Cashyn, interest rate strategist at Morgan Stanley in New York.

The Fed will buy up to $27 billion in Treasuries and as much as $2.5 billion in TIPS, coming to market every day, after making purchases on only two days this week. Monday's purchase will comprise between $7 billion and $9 billion of debt maturing 2018 to 2020.

Investors wanting to square short Treasury positions into year-end also may have boosted demand in Wednesday's auction.

I think people are taking some chips off the table into year-end. They have clearly been short and have done well with the recent sell-off and now are taking some of that back, Cashyn said.

Month-end extension, wherein investors buy longer-dated government debt to match the duration of their portfolio benchmarks, likely also boosted demand, he said.

STRONG AUCTION

Wednesday's auction came in sharp contrast with a $35 billion sale of two-year notes on Monday and a $35 billion auction of five-year notes on Tuesday, which both saw dealers take around 58 percent of the debt.

Dealers bought only 31.2 percent of the seven-year notes.

With no more auctions or buybacks for the rest of the week/year, the seven-year auction was a very important event for market direction into year-end, George Goncalves, head of U.S. rates strategy at Nomura Securities in New York, said in a note.

Dealer balance sheets were already strained by the two-year and five year auctions, but indirects stepped up and that made for a stellar auction, he said.

The seven-year notes may have been more attractive to investors wanting to cover shorts as they tend to perform well in a rally, said Morgan Stanley's Cashyn.

The most liquid seven-year notes were last up a point in price to yield 2.71 percent, down from 2.88 percent late Tuesday.

U.S. benchmark 10-year Treasury notes rose 1-6/32 in price to yield 3.34 percent, down from 3.49 percent late Tuesday.

Thirty-year bonds rose 2-3/32 in price to yield 4.41 percent from 4.54 percent.

(Editing by Leslie Adler)

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