US bonds gain on euro woes, yields hit new low

TOKYO: US Treasuries rose sharply in Asia on Tuesday following a long weekend in the United States, as worries grew over whether the euro zone can fix its escalating debt crisis.

The yield on ten-year notes fell as far as 1.91 percent, its lowest in at least 60 years, before stepping back to 1.94 percent, still way below 1.99 percent late on Friday.

"I don't see a solution (to the euro zone's debt crisis). The market is now attacking the euro zone's fundamental weakness of having one currency without having a common fiscal policy," said a trader at a Japanese bank.

US stock futures fell more than 2.7 percent on Tuesday after European shares sank on Monday, on worries over mounting losses on European banks' holdings of euro zone bonds.

Before the US market holiday on Monday, bond prices gained sharply on Friday after dismal US job data cemented expectations that the Federal Reserve will take action to boost the flagging economy.

Market participants now think the Fed will likely announce a plan to sell short-dated Treasury debt and use the proceeds to buy long bonds after its meeting on Sept 20-21.

Such speculation has sharply flattened the yield curve in recent sessions. The yield spread between two and ten-year yields shrank to 174 basis points, its narrowest since March 2009.

Copyright Reuters, 2011