LONDON, March 18 U.S. Treasuries rallied on
Monday as investors switched into less risky assets after a
bailout deal for Cyprus looked set to force losses on bank
depositors, raising new fears over the euro zone debt crisis.
Treasury futures rose to their highest in nearly two
weeks at 131-43/64, before pulling back slightly to stand at
131-28/64, still more than half a point higher on the day.
"There's a phenomenal bid out there... the market looked
like it was coming off slightly but this is going to be a global
risk-off event during the course of the day," a trader said.
The flight to safe-haven assets was sparked by the proposed
structure of a bailout for Cyprus which was agreed this weekend
by international lenders.
The bailout would be paid for in part by a one-off tax on
bank deposits - a significant departure from previous European
bailouts where savings were considered sacrosanct.
Cypriot ministers scrambled to revise the plan on Monday,
postponing a parliamentary vote to approve it until Tuesday and
prolonging the uncertainty for investors.
The deal was seen as a trigger for a rally in less risky
assets because of the precedent it may set for any future
bailouts needed by the euro zone's larger states, such as Spain
"The rescue package seems to have some scope for contagion,
and that will keep the markets careful," said Philip Marey,
strategist at Rabobank in Utrecht.
"This undermines the depositor guarantee system in the whole
euro zone... If you start messing with the deposit guarantee
system, then that is also a concern to Spain and Italy and they
are considerably larger than Cyprus."
This meant Treasury yields were likely to keep pushing lower
over the coming days, overshadowing domestic data releases and,
barring any major surprise, the Federal Reserve's two-day
policy-setting meeting on starting on Tuesday.
The U.S. central bank looks set to keep buying $85 billion
a month in mortgage and Treasury bonds in an effort to encourage
investment and bolster a weak economic recovery.