Bonds fall on view Europe debt crisis fix near

NEW YORK (Reuters) - Treasury prices fell on Monday as hopes that European leaders will commit more cash to bail out debt-laden nations revived some appetite for stocks and reduced demand for safe-haven U.S. government debt.

Benchmark 10-year yields rose to 1.90 percent, their highest level since the Federal Reserve last week said it would buy longer-dated debt and sell short-dated notes. The Fed's "Operation Twist," worth $400 billion, is aimed at lowering mortgage rates and other long-term borrowing costs with the goal of stimulating a sluggish U.S. economy.

"There is a renewed hope that measures by the ECB (European Central Bank) and others will come in and provide some liquidity and some support for Europe," said Scott Graham, head of government bond trading at BMO Capital in Chicago.

"I also think we're taking our lead from the equity markets," he said.

But there are nagging doubts whether European officials can come together to combat the debt crisis, which investors fear could spiral into one akin to the global credit crunch that tipped the world into a recession three years ago.

"The problem there is significant. Right now there is still more talking than action," said Larry Milstein, head of U.S. agency and government trading at R.W. Pressprich & Co in New York.

Bond dealers preparing for this week's corporate issues and $99 billion in Treasury coupon supply also exerted downward pressure on U.S. government debt prices.

The yield on the 10-year Treasury note has risen from more-than-60-year lows of 1.674 percent on Friday as fears European leaders were losing control of their debt problems and a slowing global economy sent investors scrambling for liquid, low-risk assets.

Thirty-year bonds, which have gotten the largest bounce from the Fed's plan to purchase longer-dated debt, fell 1-30/32 points in price to yield 2.987 percent. The yield fell as low as 2.74 percent on Friday, the lowest since January 2009.

Hopes for progress to reduce Greece debt so it can avert a default and a plan to shore up European banks lifted Wall Street stocks. The Standard & Poor's 500 .SPX rose 2.3 percent. For more, see .N

NO ACTION PLAN YET

Policymakers over the weekend discussed the possibility of beefing up the euro zone's EFSF bailout fund for debt-stricken states. They did not agree on any action.

Investors remain concerned about the ability of European officials to contain the crisis and anticipate markets will remain volatile.

Concern over the weakening U.S. economy is also likely to continue to provide a bid for bonds.

Moody's Investors Service on Monday said that President Barack Obama's deficit reduction plan would be positive for U.S. ratings but the chances of its implementation are "extremely low.

U.S. lawmakers are increasingly divided over how to cut the country's record deficit with Congress at a new impasse over spending that could shut down government operations this week.

Treasuries yields also reflect renewed fears over deflation as the economy again looks vulnerable to slipping back into recession.

Inflation expectations, as measured by the difference between the yields of 10-year Treasury Inflation-Protected Securities and regular 10-year Treasuries, have dropped to the lowest levels in a year.

Breakeven levels on the notes closed at 1.80 percent after falling as low as 1.70 percent on Friday, the lowest since last September. They are down more than 10 basis points from before the Fed's statement last Wednesday.

In "when-issued" market, traders expected the Treasury Department will sell $35 billion of two-year notes on Tuesday at a yield of 0.235 percent, according to Tradeweb. This is above the record low yield of 0.222 percent set at last month's two-year auction.

(Additional reporting by Karen Brettell; Editing by Dan Grebler)