The C$3.5 billion ($3.4 billion) auction of bonds due 2014, produced an average yield of 0.973 percent, up from 0.937 percent at the last two-year bond auction in December. December's average yield was the lowest for a two-year auction in at least two years.

There were more than C$9 billion in bids from primary dealers, resulting in a bid-to-cover ratio of 2.59, up from 2.53 percent in December and the highest since April.

The ratio is a barometer of investor demand, and a reading above 2 typically indicates healthy appetite.

"There's a lot of uncertainty about where the economy is going over the next couple months globally," said Andrew Kelvin, senior fixed-income strategist at TD Securities.

Investor fears about Europe's financial crisis were heightened on Wednesday after ratings agency Fitch urged more action by European policymakers to prevent a "cataclysmic" collapse of the euro, which sent global equities markets falling.

German economic data also showed the European Union's largest economy shrank 0.25 percent in the last three months of 2011.

Persistent concerns about the future of the euro zone fueled bids for Canadian bonds, US Treasuries and other perceived low-risk investments.

"We actually have yield on our short-term debt, unlike some of our trading partners," said Kelvin.

The yield on US 2-year government bonds was 0.24 percent on Wednesday.

Reflecting a decline in global yields over the last several months, the coupon on the Canadian 2-year bond was 0.75 percent, down from 1 percent on the previous issue.

"We're in a lower interest rate environment than when we put out the last new two-year (bond) and it's just mechanically reflective of that," said Kelvin. "Expectations for future (Bank of Canada) policy rates are subdued relative to June as well."

The Canadian central bank is seen keeping its key interest rate on hold at 1 percent for at least another year, according to a Reuters survey released on Tuesday.

The Canadian central bank said it bought C$700 million of the two-year issue for itself and on behalf of its clients.