* Prices gain as Italian center right gains in Senate
* Bernanke testimony on Tuesday in focus for bond purchase
* Treasury sells $35 billion of 2-year notes
* Fed buys $3.31 billion in U.S. debt due 2020-2023
By Chris Reese
NEW YORK, Feb 25 U.S. Treasury debt prices rose
and benchmark yields dipped to the lowest in a month on Monday
with safe-haven demand as Italian exit polls reflected
uncertainty over whether the country would be able to form a
Conflicting early forecasts of the result of Italy's
election raised the specter of deadlock in parliament that could
paralyze a new government and re-ignite the euro zone credit
Demand for safe haven U.S. debt had waned early in the
trading session after first reports of voting in Italy's
parliamentary election showed that the center-left coalition led
by Pier Luigi Bersani was ahead of Silvio Berlusconi's
That reversed after polls showed Berlusconi's party gaining,
sparking demand for safe haven U.S. and German government bonds.
"Overall the main market driver was Italy with a 'risk-on'
appetite reversing very quickly midmorning," said Justin
Lederer, Treasury strategist at Cantor Fitzgerald in New York,
adding "equities lost some or all of their gains and safe-havens
Benchmark 10-year Treasury notes were trading
19/32 higher in price to yield 1.89 percent, marking the lowest
since Jan. 25 and down from 1.96 percent late Friday.
Thirty-year bonds were trading 1-2/32 higher to yield 3.10
percent, down from 3.15 percent late Friday.
While following the election news out of Italy, investors
were also looking ahead to testimony from Federal Reserve
Chairman Ben Bernanke on Tuesday for any signs the Fed may end
its bond purchase program sooner than most expect.
Indications some Fed board members are increasingly cautious
about continuing the U.S. central bank's bond purchase program
have heightened speculation the Fed may end the buybacks before
Investors are also focused on an automatic $85 billion in
across-the board spending cuts due on Friday unless lawmakers
reach a deal on avoiding them, which could boost demand for
Treasuries as the deadline nears.
President Barack Obama and others have warned the measures
will harm the country's still fledgling economic recovery.
"Most people seem resigned to the fact that it's probably
going to happen for some period of time," said Ira Jersey, an
interest rate strategist at Credit Suisse in New York. "It might
get resolved within the regular budget process, but it will be
on the books for a few months. The idea that you're going to get
a last minute fix here I think is less likely than in the past."
The Treasury sold $35 billion in two-year notes on Monday,
the first auction of a total $99 billion in supply this week.
The government will auction $35 billion in five-year notes on
Tuesday and $29 billion in seven-year notes on Wednesday.
The Federal Reserve bought $3.31 billion in debt due 2020 to
2023 on Monday as part of its ongoing bond purchase program
meant to hold down long-term borrowing rates and help reduce the