TREASURIES-New problems in Italy drive US debt prices higher

Wed Nov 9, 2011 9:44am EST

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    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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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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