March 27, 2013 / 4:06 PM / 5 years ago

TREASURIES-Bonds rally on jitters over Cyprus bank problems

* Investors nervous as Cyprus plans to prevent bank run
    * U.S. Treasury to sell $35 billion of 5-year notes
    * February U.S. pending home sales fall more than expected
    * U.S. 10-year swap spread widest since June

    By Richard Leong
    NEW YORK, March 27 (Reuters) - U.S. Treasury debt prices
jumped on Wednesday and benchmark yields slipped to their lowest
in over three weeks, as investors flocked into safe-haven bonds
on worries about the impact of Cyprus' bank problems.
    Cyprus was completing a plan to avert a run on its banks
after it received a bailout package last weekend that included
heavy losses for large uninsured accounts. Cypriot banks will
reopen on Thursday after being shut for nearly two weeks.
    Investors worried about spreading risk to other euro-zone
countries. The scramble for safety should stoke demand at an
auction of $35 billion in five-year Treasuries supply at 1 p.m.
(1700 GMT), analysts said.
    "Europe is a lingering threat with the fragility of its
banking system," said Russ Koesterich, global chief investment
strategist at BlackRock in San Francisco. "Treasuries are one of
the tools to minimize your risk."
    Treasury prices added to their earlier gains after data
suggested a pause in the housing recovery, a bright spot in a
sluggish U.S. economy.
    The National Association of Realtors said its index on
contracts to buy existing U.S. homes last month fell 0.4
percent, which was more than expected.    
    The benchmark 10-year U.S. Treasury note shot up
21/32 in price to yield 1.838 percent, down 7.3 basis points
from late on Tuesday, while the 30-year bond was
1-8/32 higher in price, yielding 3.077 percent, down 6.6 basis
points from Tuesday's close.
    In the derivatives market, the spread between the 10-year
yield and 10-year dollar interest-rate swap rate touched 18.25
basis points, its widest level since June. The
10-year swap spread, a gauge of confidence in the global
financial system, has nearly doubled since Cyprus's banking
troubles erupted more than a week ago. 
    Traders expect new five-year notes to yield
0.7510 percent, about 2 basis points below the five-year supply
sold a month ago.
    The five-year note sale followed a mixed auction of two-year
notes on Tuesday. The U.S. Treasury Department will complete
this week's coupon-bearing debt sales with a $29 billion auction
of seven-year notes on Thursday. 
    Investors who were anxious about spillover effect from
Cyprus' bank woes and the stalemate in forming a new Italian
government, demanded higher compensation to buy Italian debt.
    "What concerns people is what will happen to other euro-zone
countries," said Justin Lederer, Treasuries strategist at Cantor
Fitzgerald, in New York. 
    Italy, the euro zone's third-biggest economy, paid investors
on Wednesday a yield of 3.65 percent on 3.91 billion euros ($5
billion) worth of new five-year debt. The yield was 0.66
percentage point higher than a five-year Italian debt sale last
month and the highest level since October. 
    Weak growth data from France, whose gross domestic product
shrank 0.3 percent in the final quarter of 2012, intensified
worries about Europe's continued drag on the global economy.
    The U.S. bond market will close at 2 p.m. (1800 GMT) on
Thursday and it will shut for the Good Friday holiday. Many
major European markets will be closed on Friday and Monday.
    "Nobody wants to take on any risk right now before the long
weekend," said Dimitri Delis, interest-rate strategist at BMO
Capital Markets in Chicago.
    Analysts also attributed the shift into Treasuries on
quarter-end portfolio rebalancing and fund managers booking
profits on the quarter's strong gains in equities. 
    On Wall Street, U.S. stocks slipped, with the Standard &
Poor's 500 index off 0.24 percent, cutting its earlier
decline almost in half. The S&P 500 has risen 9.4 percent in the
first quarter.
    In addition to renewed safe-haven bids due to Cyprus,
long-dated Treasuries prices have been supported by the Federal
Reserve's bond purchase program aimed to lower longer-term
interest rates in order to support the economic recovery.
    The U.S. central bank bought $1.555 billion in Treasuries
due between 2036 and 2043, slightly more than the $1.464 billion
of similar maturities it purchased on Monday.
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