* Prices gain on fears over Cyprus contagion
* Bond rally squeezes shorts, prompts short covering
* Fed buys $3.14 billion in notes due 2020-2023
NEW YORK, March 19 U.S. Treasuries prices rose
on Tuesday as a plan to tax bank accounts in Cyprus to help pay
for a bailout unnerved investors, who fretted other euro zone
countries could follow a similar path.
Benchmark yields hit a two-week low in the wake of demands
for the levy by European partners as a condition of helping the
island country avoid default.
Riskier assets such as stocks and some currencies have slid
all week on the news, with investors running for the safe haven
of U.S. government debt instead.
Adding to global uncertainty, Cypriot lawmakers
overwhelmingly rejected the deeply unpopular tax on Tuesday,
throwing into doubt an international bailout needed for the
country to avert default and a banking collapse.
At the same time, French Finance Minister Pierre Moscovici
said the euro zone could not lend Cyprus any more, since the
country's debt would become unmanageable.
"You don't know if this is a new way for the EU and the IMF
to start to curb the debt issues in Europe. There are some
people saying it could occur in Italy and Spain, that is really
where the fear is building and why Treasuries are reacting the
way they are. It's a contagion fear," said Jason Rogan, managing
director in Treasuries trading at Guggenheim Partners in New
Further fueling the rally, investors who had positioned for
more gains in yields on strengthening U.S. economic data got
caught by surprise and have had to cover short sales.
"Cyprus killed any move to higher yields as of right now,"
Benchmark 10-year notes were last up 16/32 in
price to yield 1.899 percent, down from 1.96 percent late on
Thirty-year bonds gained 1-6/32 in price to
yield 3.123 percent, down from 3.18 percent.
Investors will keep a close eye on Cyprus in coming days,
with an eye to any sign that countries such as Italy and Spain
are feeling renewed stress.
"The outcome in Cyprus will be the main driver of the
markets right now," said Justin Lederer, an interest rate
strategist at Cantor Fitzgerald in New York.
"There are still many issues out there, and a lot of that's
not solved, and that's what keeps the underlying bid in the safe
havens," he said.
The news from Cyprus overshadowed this week's Federal
Reserve meeting. Investors are watching for signs of when Fed
Chairman Ben Bernanke might consider tapering or ending bond
purchases as recent data have pointed to gathering momentum in
the world's biggest economy.
Most Wall Street economists expect the Fed will continue its
bond purchases through 2013 before tapering or ending the
buybacks in 2014.
Uncertainty in Cyprus, and fears that it may spread into
other countries in the euro zone and harm economic prospects
there, might give the Fed further reason to continue its bond
purchases, traders said.
The Fed bought $3.14 billion in notes due 2020 and 2023 on
Tuesday as part of its ongoing purchase program.