March 19, 2013 / 11:06 AM / 5 years ago

TREASURIES-Cypriot bailout nerves lift U.S. bonds

LONDON, March 19 (Reuters) - U.S. Treasuries edged up in Europe on Tuesday as concern that the situation in Cyprus could deteriorate and spur a revival of the euro zone’s debt crisis, supported demand for low-risk bonds.

Treasuries followed German Bunds higher after a Cypriot government spokesman said parliament was set to reject a divisive tax on bank deposits in a vote later in the day, a move that would push the island closer to a default and banking collapse.

U.S. 10-year T-notes were last 4/32 up in price to yield 1.94 percent, 1.4 basis points less than in late U.S. trade. The benchmark yield touched a 1-1/2 week low near 1.90 percent on Monday as news of the Cyprus plan rocked markets.

“There’s talk that the Cyprus parliament is set to reject the bailout plan or the vote may be postponed so all this uncertainty is keeping a bid in the Treasury market,” a trader said.

“We’re also seeing outright buying (of Bunds) in Europe at the long end of the curve, that’s also helping out the bid in Treasuries.”

The 30-year T-bond rose 2/32 in price to yield 3.16 percent, 2.3 bps down from late New York trade.

Although European officials have said the Cyprus deposit tax was a one-off measure for a country that accounts for just 0.2 percent of European output, investors fear the rescue plan could set a precedent for future euro zone bailouts and prompt runs on banks in other struggling euro zone countries.

“The incident has probably ensured that if a bank or banking system in Europe is again under strain then depositors are, as a minimum, likely to be on the table as a bargaining tool and these depositors would be rational to think hard about the safety of their money,” Deutsche strategists said in a note.

Investors were also looking to a Federal Reserve meeting on Tuesday and Wednesday, watchful for any signs Fed Chairman Ben Bernanke may consider tapering off or ending bond purchases after recent data pointed to an improving U.S. economy.

Most Wall Street economists expect that the Fed will continue its bond purchases through 2013 but at least begin to wind down in 2014.

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