CORRECTED-TREASURIES-Bonds rally on nervousness over Cyprus bank problems

Wed Mar 27, 2013 11:03am EDT

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(Corrects spelling of Blackrock's Koesterich in para 4)
    * Investors nervous as Cyprus plans to avert bank run
    * Italian borrowing cost jumps to highest in 5 months
    * U.S. Treasury to sell $35 bln of 5-year notes
    * U.S. Fed to buy $1.25-1.75 bln long-dated government debt

    By Richard Leong
    NEW YORK, March 27 (Reuters) - U.S. Treasury debt prices
jumped on Wednesday with benchmark yields at their lowest in
three weeks, as investors flocked into safe haven bonds on
worries about the spreading risk across the euro zone due to the
bank problems in Cyprus.
    Cyprus on Wednesday is finalizing a plan to avert a massive
withdrawal of cash from its banking system after it received a
10 billion euro bailout package last weekend that included heavy
losses for large uninsured accounts. Cypriot banks will reopen
on Thursday after being shut for nearly two weeks.
 
    Investors' scramble for safety should stoke demand at an
auction of $35 billion in five-year Treasuries supply at 1 p.m.
(1700 GMT), analysts said.
    "Europe is a lingering threat with the fragility of its
banking system," said Russ Koesterich, global chief investment
strategist at BlackRock in San Francisco. "Treasuries are one of
the tools to minimize your risk."
    Benchmark 10-year notes were up 14/32 in price
to yield 1.863 percent, down 4.8 basis points from late on
Tuesday, while the 30-year bond was 27/32 higher in
price, yielding 3.099 percent, down 4.4 basis points from
Tuesday's close.
    Traders expect new five-year notes to yield
0.7660 percent, about 1 basis point below the five-year supply
sold a month ago.
    The five-year note sale followed a mixed auction of two-year
notes on Tuesday. The U.S. Treasury Department will complete
this week's coupon-bearing debt sales with a $29 billion auction
of seven-year notes on Thursday. 
    Investors who were anxious about spillover effect from
Cyprus's bank woes and the stalemate in forming a new Italian
government, demanded higher compensation to buy Italian debt.
    The euro zone's third biggest economy paid investors on
Wednesday a yield of 3.65 percent on 3.91 billion euros ($5
billion) worth of new five-year debt. The yield was 0.66
percentage point higher than a five-year Italian debt sale last
month and the highest level since October. 
    Weak growth data from France, whose gross domestic product
shrank 0.3 percent in the final quarter of 2012, intensified
worries about Europe's continued drag on the global economy.
 
 
    The U.S. bond market will close at 2 p.m. (1800 GMT) on
Thursday and shut for the Good Friday holiday. Many major
European markets will be closed on Friday and Monday.
    "Nobody wants to take on any risk right now before the long
weekend," said Dimitri Delis, interest rate strategist at BMO
Capital Markets in Chicago.
    Wall Street stocks opened lower with the Standard & Poor's
500 index off 0.66 percent. 
    In addition to safe haven bids, long-dated Treasuries prices
have been supported by the Federal Reserve's bond purchase
program aimed to lower longer-term interest rates in order to
support the U.S. economic recovery.
    The U.S. central bank will buy between $1.25 billion and
$1.75 billion in bonds due between 2036 and 2043 at 11 a.m.
(1500 GMT).

 (Reporting by Richard Leong; Editing by Chris Reese)
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