TREASURIES-New problems in Italy drive US debt prices higher
* Italian yield curve inverted as confidence wanes * Merkel spokesman says Germany concerned about Italy * Safety bid offsets set-up for $24 billion 10-year sale By Emily Flitter NEW YORK, Nov 9 (Reuters) - U.S. Treasury debt prices jumped on Wednesday as Italian bond yields reached unsustainable levels in a deepening euro zone debt crisis, driving investors back to the safety of U.S. bonds despite extremely low yields. Benchmark 10-year notes were up more than a point while 30-year Treasury bonds traded nearly three points higher. Italy looked to be the next country tumbling into fiscal chaos like that seen in Greece after investors lost confidence in Greek bonds and European leaders, central bankers and the International Monetary Fund had to take steps to intervene. "It's been a fiscal crisis in Europe that's been getting worse and worse every day and now that we're talking about the world's third-largest bond market it's even more intense," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York. Clearing house LCH.Clearnet raised margin calls on Italian government bonds and Italy's 10-year bond yield rose above 7 percent, a level widely viewed as unsustainable. "People have been reducing their portfolio exposure for a month now. The LCH.Clearnet warning will make that continue at an even quicker pace," Klingman said. Investors began demanding higher interest on two-year Italian notes than on five-year notes, a troubling detail that suggested confidence was waning in Italy's ability to keep making payments on its debt.In New York, analysts took a grim tone in morning research: "All eyes remain squarely focused on the spreading contagion in Europe and the implications for the broader European sovereign credit system, and of course the future of the euro itself," wrote Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut. "The parallels between the situations in Italy and Greece are uncanny in both the timelines as well as the market's response -- with the notable exception of the outright size of the Italian sovereign debt market, which is much larger at $2.2 trillion." Benchmark 10-year notes were trading 1-2/32 higher in price with yields dipping to 1.96 percent from 2.08 percent late on Tuesday. Thirty-year bonds were 2-23/32 higher in price to yield 3.01 percent from 3.14 percent at Tuesday's close. The Treasury Department is preparing to auction $24 billion in 10-year Treasury notes at 1 p.m. (1800 GMT). Treasury dealers generally try to sell into the market ahead of an auction to drive down the price of the security being auctioned but safe-haven demand looked ready to overwhelm that move. "The auction could be challenged because this run-up is once again being spurned by a flight-to-quality bid, which could go away if something comforting comes out of Europe," said David Coard, head of fixed income sales and trading at Williams Capital in New York. "Given the magnitude and the speed with which we've gotten to this yield on 10s and 30s I've got to believe there's going to be a little bit of circumspection going into the auction today."
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