LONDON, March 27 (Reuters) - U.S. government bond prices rose on Wednesday as a soft Italian debt auction aggravated concerns over the wider impact of a Cypriot bailout, further curbing investors' appetite for risk-taking.
Treasury futures rose 25/64 to 132-3/32, hitting their highest levels this month. Benchmark 10-year yields dropped 5 basis points to 1.86 percent.
"Starting with the situation in Cyprus and now the political crisis in Italy, Europe is one of the main drivers here," said Alessandro Giansanti, strategist at ING in Amsterdam.
Cyprus is finalising measures to stop money flooding out of the country after a rescue deal which will wipe out some holders of bank bonds and inflict heavy losses on large depositors.
The deal has put investors on alert for any sign that savers in other euro zone countries will look to withdraw their cash, fearing that the Cypriot bailout model could be applied more widely.
The rise in U.S. debt prices extended after an Italian auction which raised close to the maximum targeted amount but disappointed some investors, with pricing of the new debt showing signs of sluggish demand.
"There's a pretty strong risk-off tone today, we've been very busy," said one U.S. bond trader based in London.
The U.S. data calendar is thin for Wednesday leaving investors to chew over planned speeches from U.S. central bankers, but market participants said the euro zone was expected to remain the dominant influence on the market.