TREASURIES-Prices gain for a third day on euro worries

Tue Jul 12, 2011 10:07am EDT

Related Topics

* Benchmark 10-year note yield touches seven-month low

* Treasury to auction $32 bln of 3-year notes

* US government remains divided over budget gap (Adds analysts' quotes, updates prices)

By Chris Reese

NEW YORK, July 12 (Reuters) - U.S. Treasuries rose on Tuesday as worries over a systemic debt crisis in the euro zone fueled a third straight day of buying of lower-risk assets, pushing benchmark yields to seven-month lows.

Italian and Spanish government bond yields surged to their highest levels in 14 years on Tuesday after pledges by euro zone finance ministers to help highly indebted states failed to convince markets the European debt crisis would be resolved soon.

The ministers' promises late on Monday of cheaper loans, longer maturities and a more flexible rescue fund to help Greece and other EU debtors failed to stop contagion spreading to Italy and Spain. For details see [ID:nL6E7IB1PQ].

"The situation in Europe continues to deteriorate and uncertainties within the sovereign credit space remain high. Treasuries remain at the mercy of headlines from Europe and the broader implications for the euro," said David Ader, head of government bond strategy at CRT Capital in Stamford, Connecticut.

Investors sought a safe-haven in U.S. government debt, and benchmark 10-year Treasury notes US10YT=RR posted a third day of gains, trading 6/32 higher in price on Tuesday to yield 2.90 percent, down from 2.92 percent late Monday.

Benchmark yields dipped to 2.82 percent overnight, marking the lowest since early December.

"We are subject every minute to the news about what is going on in Europe," said James Combias, head of bond trading at Mizuho Securities in New York, adding however that a paring of strong overnight price gains was likely related to the U.S. Treasury's auction of $32 billion of three-year notes on Tuesday afternoon.

"At some point we do have to make some room to take down some of the supply," Combias said.

In addition to the three-year notes, the Treasury will sell $21 billion of 10-year notes on Wednesday and $13 billion of 30-year bonds on Thursday.

Ahead of the auction, three-year notes US3YT=RR were trading 1/32 lower in price to yield 0.63 percent, up slightly from 0.61 percent late Monday. In the when-issued market, considered a proxy for where investors expect the high yield at the auction, three-year notes US3YTWI=TWEB were trading with a yield just below 0.66 percent.

Some investors expected the desire for safe-haven assets to prop up demand in Tuesday's auction.

"Yields may not be attractive or at least as attractive as they were only a few sessions ago, but sentiment clearly favors safety and liquidity," said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York.

Meanwhile, the White House and U.S. federal lawmakers remain divided over ways to close the $1.4 trillion U.S. budget gap, the key hurdle that has prevented them from agreeing on raising the debt limit. [ID:N1E76A1V4]

U.S. Treasury Secretary Timothy Geithner on Tuesday said that time is running out for a deal to raise the U.S. debt limit, and wants a broad agreement with Congress in place by the end of next week at the latest.

Speaking at a finance symposium at the Treasury Department, Geithner vowed that Congress would raise the debt limit ahead of an Aug. 2 deadline when the government will risk default, adding, "Failure is not an option." [ID:nN1E76B0EB].

Two-year Treasury notes US2YT=RR were trading 1/32 lower in price to yield 0.38 percent, up from 0.36 percent late Monday, while 30-year bonds US30YT=RR were 18/32 higher to yield 4.17 percent from 4.21 percent.

(Additional reporting by Kirsten Donovan in London) (Editing by Theodore d'Afflisio)

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