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 NEW YORK: US Treasuries climbed in a choppy session on Tuesday as Moody's issued a warning on France's credit rating and expectations faded for a definitive solution to the European debt crisis at a summit this week.

Benchmark yields fell to their lowest in two weeks, but have since staged a comeback. Thirty-year yields, meanwhile, were also under pressure, sliding to their lowest in about a week.

Volume was reportedly dominated by speculative accounts, traders said, but with real money names supposedly on the bid in the three- to seven-year maturities.

Treasury prices once again tracked movements in the US stock market, which recovered from an earlier drubbing caused by a deeper-than-expected loss at US investment bank giant Goldman Sachs and disappointing guidance at technology bellwether IBM.

"There's an overall sense of caution," said Tom Porcelli, chief economist at RBC Capital Markets in New York.

"While some people are reconsidering their stance of an absolute worst-case scenario (on the global economy) and it's a stance that we don't necessarily agree with, for the most part the market still has a very cautious approach where people are not willing to go on a limb one way or the other."

Gains in Treasuries gathered pace after rating agency Moody's said it may slap a negative outlook on France's triple-A rating in the next three months if the country fails to make progress on crucial fiscal and economic reforms.

Enthusiasm has waned for a meeting of finance ministers and central bankers of the Group of 20 major economies on Oct. 23 that was initially expected to come up with a comprehensive solution to Europe's debt troubles.

On Monday, German Finance Minister Wolfgang Schaeuble poured cold water on any positive view about the summit. he said European governments will not present an ultimate solution for the sovereign debt crisis at the weekend meeting.

News on Tuesday suggesting German Chancellor Angela Merkel expects European leaders to produce a "work plan" for Greece at the EU summit did little to re-ignite hopes for a more positive outcome at the summit.

"It seems that people are not counting on the European Union summit," for a solution on the euro zone's fiscal problems, said Suvrat Prakash, interest rate strategist at BNP Paribas in New York.

Treasury prices earlier pared gains after a bigger-than-expected increase in US producer prices for September, their largest rise in five months, and strong earnings from Bank of America Corp, the largest US bank by assets.

That dented gains racked up after a steeper-than-expected loss at US investment bank giant Goldman Sachs. US 30-year bond prices jumped more than a point after the release of the bank's earnings. For Goldman's results.

"The loss at Goldman wasn't expected to be this steep and raises a whole bunch of questions on banking issues," said David Ader, head of government bond strategy at CRT Capital in Stamford, Connecticut.

"The loss is on asset markdowns. So there is this sort of price recognition of the uncertainty factor of basically what do banks own."

The bias in the Treasuries market has therefore remained positive, despite venturing into negative territory twice in the New York session, with the appeal of US government bonds enhanced by a slew of negative news around the world including weaker-than-forecast gross domestic product growth in China.

In midday trading, benchmark 10-year Treasury prices rose 9/32 in price to yield 2.12 percent compared with 2.18 percent late on Monday. Yields fell as low as 2.08 percent, their lowest since Oct 7.

US 30-year bonds were up 13/32, yielding 3.11 percent versus 3.16 percent on Monday.

Copyright Reuters, 2011

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