Treasuries edge higher on European banking worries

LONDON (Reuters) - U.S. Treasuries rose for the second successive day on Wednesday on renewed concerns about the health of the European banking system, and as markets pondered further easing moves by the Federal Reserve.

The spread of 10-year U.S. Treasuries over equivalent maturity German Bunds widened intraday to 38 basis points from 33 bps at the start of euro zone debt trading on Wednesday as Bunds outperformed, although the spread was still narrower than the 40 bps on Tuesday.

Ireland's extension of guarantees for short-term banking liabilities late Tuesday added to jitters about the European banking sector.

"People are getting excited by Europe's problems and what it might mean in the U.S. because it may help boost the case for the Federal Reserve to reintroduce more Quantitative Easing," a dealer said.

At 1030 GMT (6:30 a.m. EDT), the December T-Note future rose by 3/32 to 124-30/32, pulling further away from a one-month low struck on Friday.

The worries about Europe's banks also drove down stock markets in Europe .FTEU3 and put the euro on the defensive.

Gains were also supported by strong bids at the first of this week's three bond offerings totaling $67 billion.

Tuesday's three-year T-Note auction produced a record-low yield, with the sale attracting bids worth 3.21 times the amount on offer, indicating investor appetite.

The Treasury sells $21 billion in reopened 10-year notes on Wednesday and $13 billion in reopened 30-year bonds on Thursday.

"Even if Wall Street stocks open lower, it won't much help the 10-year T-Note auction because it is the short end that mostly gains on that," Marc Ostwald, a bond strategist at Monument Securities in London, said.

"The current yield is at multi-month lows and therefore not so attractive for investors. But if people believe the U.S. economy will slowdown or that the Fed will bring in QE, you will buy the T-Note today," Ostwald added.

The benchmark 10-year note was yielded 2.60 percent, up 0.9 basis points since the New York close on Tuesday.

The two-year note was 1.2 bps higher at 0.50 percent.

While analysts are almost certain the Fed will ease again in the event of a further economic slowdown, some doubted there was much more room for yields to fall.

(Editing by Toby Chopra)