NEW YORK: US government debt prices rose on Tuesday as worries about contagion from the deterioration of Spain's banking system stoked demand for bonds and other low-risk investments.
The modest gains in Treasuries were curbed by a rebound in global stock markets on hopes of more stimulus from China and the Greek polls showing pro-bailout parties in the lead ahead of next month's elections, analysts said.
"It's mostly how you solve the Spanish bank problem so there's a bit of safe-haven buying," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment Banking in New York.
Spanish 10-year yields jumped to 6.53 percent on Monday, their highest since November 2011, as the euro zone's fourth-largest economy seemed prepared to use more public debt to recapitalize its ailing banks. The resurgence in the government's borrowing costs would make its refinancing efforts even more difficult.
A 7 percent yield was the tipping point that pushed other euro zone members Ireland and Portugal into taking EU/IMF bailouts.
"This is a test for Spain to see how it handles its banking system," Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia, said of Spain's debt plan.
Concerns Spain's financial woes could deepen the euro-zone debt crisis led some investors to beef up their Treasuries holdings, whose yields are hovering near historic lows.
On below-average volume, benchmark 10-year Treasury notes were trading in a narrow range. They were last up 6/32 in price at 100-7/32, yielding 1.72 percent, down 2 basis points from Friday.
The 10-year yield is within striking distance of 1.67 percent, which was the lowest level in at least 60 years.
June 10-year T-note futures were last up 3/32 at 133-28/32 after setting a contract high at 134.
German Bund futures were down 8 basis points at 144.29 after hitting a contract high of 144.58.
The three major Wall Street indexes were up more than 1 percent.
US financial markets were closed on Monday for the Memorial Day holiday.
Treasuries prices pulled back from their initial highs after a news report, citing unidentified sources, that China's biggest banks appeared to have increased lending toward the end of this month as Beijing starts to fast-track its approval of infrastructure investments in a bid to stem slowing growth.
Investors were also encouraged by weekend polls in Greece that showed the conservative New Democracy party, which backs the country's international bailout, has a lead over the leftist SYRIZA party, which opposes it ahead of a June 17 election.
In the United States, economic data suggested the US economy continues to muddle along with ongoing support from the Federal Reserve.
US consumer confidence unexpectedly fell to its lowest level in four months in May on renewed worries about the economy, according to the Conference Board.
However, an S&P/Case Shiller report said average home prices in 20 major US cities edged up 0.1 percent in March, shaving their year-on-year decline to 2.6 percent.
These economic figures were not dire enough to spur a further rise in Treasuries prices.
"The economic fundamentals are less negative than what the market has seemed to have priced in," Janney's LeBas said.
While the US housing market remains stagnant and the three-year-old euro-zone debt crisis still poses a threat to the US economy, expectations remain strong that the US central bank will embark on a third round of large-scale bond purchases, dubbed QE3.
The Fed's $400 billion Operation Twist is scheduled to expire at the end of June. This program involves sales of the Fed's shorter-dated Treasuries from its portfolio and its purchases of longer-dated government debt in the open market. It is aimed at holding down mortgage rates and other long-term borrowing costs in an effort to stimulate borrowing.
It sold $8.64 billion of Treasuries with maturities range from July 2014 to May 2015.
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