February 6, 2013 / 4:35 PM / in 5 years

TREASURIES-Nagging Europe concerns lift U.S. bond prices

* Italian, Spanish yield rise renews bids for Treasuries
    * Weaker European stocks also feed safe-haven bond demand
    * U.S. Treasury to sell $72 bln in debt next week
    * Fed purchases $3.65 bln in 5-to-7-year notes

    By Richard Leong
    NEW YORK, Feb 6 (Reuters) - U.S. government debt prices rose
on Wednesday as weaker U.S. and European stock prices and
overhanging worries about possible political shakeups in Italy
and Spain rekindled demand for safe-haven bonds.
    Bond prices climbed also as traders sought to profit from
the Federal Reserve's latest purchase of Treasuries, which was
part its $44 billion monthly program aimed to lower borrowing
costs and unemployment.
    The U.S. central bank bought $3.65 billion in government
bonds to mature in Nov. 2018 to Jan. 2020. 
    "There are still a lot of possible disruptive currents
coming from Europe," said Lou Brien, market strategist at DRW
Trading in Chicago. "The problems there have not gone away, but
the market had just ignored them until this week."
    In addition to speculation about leadership changes in Spain
and Italy, traders have been monitoring comments among European
leaders about the euro, which has strengthened against
the dollar and yen in the first six weeks of the year.
    The rise in the single currency, which could hurt the
region's exporters, might put pressure on the European Central
Bank to act though analysts reckon is highly unlikely at this
point. ECB policy-makers will meet on Thursday. 
    These concerns were mitigated by the limited decline in
stock prices and a longer-term view that U.S. interest rates
will rise as the economy, boosted by the housing sector, is
expected to gather momentum later this year, investors and
traders said.
    "You are seeing some trading volatility around this 2
percent yield level" on the 10-year notes, said Jason Rogan,
director of Treasuries trading at Guggenheim Partners in New
    Benchmark 10-year notes were 5/32 higher in
price at 96-26/32 on average trading volume to yield 1.985
percent, down 2.1 basis points from late on Tuesday when
Treasury prices fell.
    The 30-year bond was up 6/32 in price at
91-12/32 to yield 3.2007 percent, 1.3 basis points lower than
    The yield on 10-year Spanish government notes 
ended up 6 basis points to 5.43 percent, while the yield on
Italian sovereign debt finished almost 10 basis
points higher at 4.55 percent. 
    The index on top European stocks provisionally
closed 0.4 percent lower, above its earlier lows, while Wall
Street share prices were modestly lower, bouncing off their
session lows.  
    In the absence of major economic data, investors received
details on the U.S. Treasury Department's debt auctions at its
quarterly refunding next week.
    It will sell $32 billion in three-year notes on Tuesday; $24
billion in 10-year debt on Wednesday and $16 billion 30-year
bonds on Thursday, matching analyst forecasts.
    It added that it plans to release a final decision on
selling floating-rate debt for the first time. Treasury expected
the notes' debut to occur within the next year. 
    "It shows they are looking for different ways to add
supply," Guggenheim's Rogan said.
    While a major deal on federal spending and taxes in
Washington remained elusive, the recent move to temporarily
raise the federal debt ceiling has averted a government default.
    Investors feared another political showdown between U.S.
President Barack Obama and Republican lawmakers over spending,
which could result in a package of budget cuts worth $112
billion this year to kick in on March 1.
    Further government reduction could depress economic activity
as seen in the fourth quarter of 2012 when the gross domestic
product contracted by 0.1 percent due partly to cutbacks in the
government's defense spending.
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