TOKYO, March 28 U.S. Treasuries were firm on Thursday with the benchmark yield stuck near three-week low hit the previous day after Italy's soft bond auction fanned worries the euro zone's debt crisis could take a turn for the worse.
* The yield on 10-year notes traded at 1.837 percent, near Wednesday's low of 1.833 percent and its March 4 low of 1.827 percent.
* "The main driver seems to be Europe again, as the chance of a grand-coalition in Italy seems to be thin. Given that we've had some sort of crisis in Europe every May in recent years, I feel like we could buy Treasuries a bit more," said a trader at a Japanese bank.
* Bonds rallied on Wednesday even as the Treasury sold $35 billion in new five-year notes to solid demand, the second sale of $99 billion in new coupon-bearing debt this week.
* Italy paid more to borrow over five years than it has since October at an auction on Wednesday as lack of progress in forming a new government and worries about Cyprus's bailout hit demand, although the 10-year debt auction
* Centre-left leader Pier Luigi Bersani has been in talks with rival parties this week to try to form a government, but there is little sign he can muster enough seats to do so and Italians may have to return to the polls, dragging out the uncertainty.
* Treasuries were also supported by fear that the Cyprus rescue plan, which imposes heavy losses on depositors in the country, may prompt depositors and bond investors in other fragile euro zone countries to shift funds to safer assets, such as Treasuries.
* Cypriots are expected to descend in their thousands on Thursday on banks, which reopen with tight controls imposed on transactions to prevent fleeing depositors from cleaning out the vaults in a catastrophic bank run.
* In addition, month-end buying ahead of a long weekend also underpinned Treasuries. The U.S. bond market will close at 2 p.m. (1800 GMT) on Thursday and it will be shut on the Good Friday holiday.