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us-treasuriesLONDON: US Treasuries rose on Monday in European trading as lower stock markets underpinned appetite for safe-haven assets, with the 10-year yield testing key levels ahead of Federal Reserve meeting minutes later this week.

Ten-year US Treasury prices rose, pushing yields 1.1 basis points lower to 3.158 percent. Analysts said the market was testing the 3.15 percent level. The yield hit a five-month low of 3.13 percent earlier this month.

‘Equities performed poorly on Friday in the US and in Asia this morning, that fed through to Europe and it looks like the US is going to start on a softer note. So as a result, Treasuries are benefiting from a little bit of flight to quality,’ said Nick Stamenkovic at RIA Capital Markets.

The T-note future rose 15/64 to 122-47/64 as US stock futures pointed to a lower opening on Wall Street.

Softer commodity prices also underpinned appetite for fixed income on the view that lower oil and metal prices could ease the pressure on global inflation. The rout in commodity prices over the past two weeks has prompted many market players to put their money into safe-haven bonds for now.

The retreat in oil prices has also lent fresh credibility to Fed officials' predictions that the spike in energy and commodity prices would be a passing phenomenon. Officials may thus hint that official rates will remain at record low levels for a while in minutes from the Fed's April meeting due later this week -- further underpinning bonds.

While the Fed is expected to keep monetary policy easy for a while -- a rate hike is only expected next year -- attention turns to the end of its $600 billion bond buying program at the end of June.

‘Really the debate is further down the line, about the passage of QE2 (second round of quantitative easing) and whether that's a bond market negative or a bond market positive,’ Charles Diebel, head of market strategy at Lloyds Bank.

Key is whether the Fed decides to reinvest proceeds from maturing securities -- as expected by the market -- which would mean sticking to ease monetary policy.

Short-dated US Treasuries outperformed other maturities with yields on two-year and five-year paper easing to 0.52 percent and 1.81 percent respectively.

Uncertainties over the euro zone debt crisis were heightened by the weekend arrest of International Monetary Fund head Dominic Strauss-Kahn over sexual assault charges. Although bond-positive, analysts said the news was having little impact on the US Treasury market.

Copyright Reuters, 2011

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