* Benchmark 10-year note yield touches seven-month low
* Treasury to auction $32 bln of 3-year notes
* US government remains divided over budget gap
(Adds analysts' quotes, updates prices)
By Chris Reese
NEW YORK, July 12 U.S. Treasuries rose on
Tuesday as worries over a systemic debt crisis in the euro zone
fueled a third straight day of buying of lower-risk assets,
pushing benchmark yields to seven-month lows.
Italian and Spanish government bond yields surged to their
highest levels in 14 years on Tuesday after pledges by euro
zone finance ministers to help highly indebted states failed to
convince markets the European debt crisis would be resolved
The ministers' promises late on Monday of cheaper loans,
longer maturities and a more flexible rescue fund to help
Greece and other EU debtors failed to stop contagion spreading
to Italy and Spain. For details see [ID:nL6E7IB1PQ].
"The situation in Europe continues to deteriorate and
uncertainties within the sovereign credit space remain high.
Treasuries remain at the mercy of headlines from Europe and the
broader implications for the euro," said David Ader, head of
government bond strategy at CRT Capital in Stamford,
Investors sought a safe-haven in U.S. government debt, and
benchmark 10-year Treasury notes US10YT=RR posted a third day
of gains, trading 6/32 higher in price on Tuesday to yield 2.90
percent, down from 2.92 percent late Monday.
Benchmark yields dipped to 2.82 percent overnight, marking
the lowest since early December.
"We are subject every minute to the news about what is
going on in Europe," said James Combias, head of bond trading
at Mizuho Securities in New York, adding however that a paring
of strong overnight price gains was likely related to the U.S.
Treasury's auction of $32 billion of three-year notes on
"At some point we do have to make some room to take down
some of the supply," Combias said.
In addition to the three-year notes, the Treasury will sell
$21 billion of 10-year notes on Wednesday and $13 billion of
30-year bonds on Thursday.
Ahead of the auction, three-year notes US3YT=RR were
trading 1/32 lower in price to yield 0.63 percent, up slightly
from 0.61 percent late Monday. In the when-issued market,
considered a proxy for where investors expect the high yield at
the auction, three-year notes US3YTWI=TWEB were trading with
a yield just below 0.66 percent.
Some investors expected the desire for safe-haven assets to
prop up demand in Tuesday's auction.
"Yields may not be attractive or at least as attractive as
they were only a few sessions ago, but sentiment clearly favors
safety and liquidity," said Justin Lederer, interest rate
strategist at Cantor Fitzgerald in New York.
Meanwhile, the White House and U.S. federal lawmakers
remain divided over ways to close the $1.4 trillion U.S. budget
gap, the key hurdle that has prevented them from agreeing on
raising the debt limit. [ID:N1E76A1V4]
U.S. Treasury Secretary Timothy Geithner on Tuesday said
that time is running out for a deal to raise the U.S. debt
limit, and wants a broad agreement with Congress in place by
the end of next week at the latest.
Speaking at a finance symposium at the Treasury Department,
Geithner vowed that Congress would raise the debt limit ahead
of an Aug. 2 deadline when the government will risk default,
adding, "Failure is not an option." [ID:nN1E76B0EB].
Two-year Treasury notes US2YT=RR were trading 1/32 lower
in price to yield 0.38 percent, up from 0.36 percent late
Monday, while 30-year bonds US30YT=RR were 18/32 higher to
yield 4.17 percent from 4.21 percent.
(Additional reporting by Kirsten Donovan in London)
(Editing by Theodore d'Afflisio)