TREASURIES-Yields dip to 1-month low on Italy election uncertainty
* Prices rise as Italian center right gains in Senate * Bernanke testimony seen supportive for bond purchases * Treasury to sell $35 billion of 5-yr notes * Fed bought $3.31 billion in U.S. debt due 2020-2023 By Ellen Freilich NEW YORK, Feb 25 (Reuters) - U.S. Treasury debt prices rose and benchmark yields dipped to the lowest level in a month on Monday as uncertainty over whether Italy would be able to form a stable government whetted investors' appetite for safe-haven U.S. debt. Conflicting early forecasts of the result of Italy's election raised the specter of deadlock in parliament that could paralyze a new government and re-ignite the euro zone credit crisis. Early reports on voting in Italy's parliamentary election indicated the center-left coalition led by Pier Luigi Bersani was ahead of Silvio Berlusconi's center-right bloc, and that damped demand for U.S. debt, sending prices lower and yields up. But when polls showed Berlusconi's party gaining, demand for safe-haven U.S. and German government bonds picked up. U.S. Treasury prices rose and their yields fell to one-month lows. "Elections in Italy drove the moves in the U.S. Treasury market today," said Eric Stein, vice president and portfolio manager at Boston-based Eaton Vance Investment Managers. The 10-year note yield posted its biggest one-day drop since early November. Benchmark 10-year Treasury notes rose 29/32 in price to yield 1.86 percent, the lowest since Jan. 25 and down from 1.96 percent late Friday. The 30-year bond rose 1-26/32 in price as its yield fell to 3.06 percent, down 9.3 basis points from Friday, its biggest one-day drop since June 1. "The main market driver was Italy with a 'risk-on' appetite reversing very quickly midmorning," Cantor Fitzgerald Treasury strategist Justin Lederer said, adding that "equities lost some or all of their gains and safe-havens went bid." Italy's center-left coalition held a slim lead over former Prime Minister Berlusconi's center-right bloc in the election for the lower house of parliament, three TV projections indicated on Monday. But any government must also command a majority in the Senate, a race decided by region. Projections indicated the center-right was leading in the Senate, but that no coalition would have enough seats to form a majority in the upper house. While following the election news out of Italy, investors were also looking ahead to semi-annual congressional testimony from Fed Chairman Bernanke on Tuesday for signs the Fed may end its bond purchase program sooner than expected. Some Fed board members have sounded increasingly cautious about continuing the U.S. central bank's bond purchase program. That conversation has heightened speculation the Fed may end the buybacks before year-end. Stein, and others, said Bernanke's testimony could reassure bond investors on that score. "I do expect Bernanke to be very dovish tomorrow and not show as much concern about the negative effects of quantitative easing as some of his colleagues have recently," Stein said. Investors are also focused on an automatic $85 billion in across-the board spending cuts due on Friday unless lawmakers reach a deal on avoiding them, which could boost demand for Treasuries as the deadline nears. President Barack Obama and others have warned that the measures will harm the country's still-fledgling economic recovery. "Most people seem resigned to the fact that it's probably going to happen for some period of time," Ira Jersey, an interest rate strategist at Credit Suisse in New York, said of the spending cuts, known as sequester. "It might get resolved within the regular budget process, but it will be on the books for a few months. The idea that you're going to get a last minute fix here is less likely than in the past." The waning days of February have also raised expectations of "relatively large month-end buying needs," said Stone & McCarthy market analyst John Canavan. "That helped drive Treasuries through some key technical levels, which really helped yields cascade lower," he said. Treasuries had been mired in narrow ranges for a month through the end of last week, Canavan said, with the 30-year yield stuck between 3.13 percent to 3.25 percent. The 10-year yield, meanwhile, moved between 1.93 percent and 2.06 percent. "The high end of those ranges was tested last Wednesday, and the low end was tested on Thursday and Friday before today's break," he said. The Treasury sold $35 billion in two-year notes on Monday, the first auction of a total $99 billion in supply this week. The government will auction $35 billion in five-year notes on Tuesday and $29 billion in seven-year notes on Wednesday. All the auctions settle on Thursday, the last day of the month. Canavan said demand for the five-year notes could lag longer-term issues. The Federal Reserve bought $3.31 billion in debt due 2020 to 2023 on Monday as part of its ongoing bond purchase program meant to hold down long-term borrowing rates and help reduce the unemployment rate.
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