New problems in Italy drive US debt prices higher

NEW YORK: US Treasury debt prices rose on Wednesday as the quickly evolving debt crisis in the euro zone drove investors back into the safety of US bonds, despite their extremely low yields.

Italy looked to be the next country tumbling into fiscal chaos like that seen in Greece after investors lost confidence in Greek bonds, and European leaders, central bankers and the International Monetary Fund had to take steps to intervene.

Yields on Italian bonds rose, with investors demanding higher interest on two-year Italian notes than on five-year notes, a troubling new detail that suggested confidence was waning in Italy's ability to keep making payments on its debt.

A spokesman for German Chancellor Angela Merkel told a news conference on Wednesday that the German government was concerned about the newest developments and was watching Italy with "great interest."

In New York, analysts took a grim tone in morning research: "All eyes remain squarely focused on the spreading contagion in Europe and the implications for the broader European sovereign credit system, and of course the future of the euro itself," wrote Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

"The parallels between the situations in Italy and Greece are uncanny in both the timelines as well as the market's response -- with the notable exception of the outright size of the Italian sovereign debt market, which is much larger at $2.2 trillion."

After briefly posting gains of as much as a point, benchmark 10-year notes were trading 27/32 higher in price with yields dipping to 1.99 percent from 2.08 percent late on Tuesday. Thirty-year bonds were 2 points higher in price to yield 3.04 percent from 3.14 percent at Tuesday's close.

The Treasury Department is preparing to auction $24 billion in 10-year Treasury notes at 1 p.m. (1800 GMT). Treasury dealers generally try to sell into the market ahead of an auction to drive down the price of the security being auctioned, but safe-haven demand looked ready to overwhelm that move. Lyngen said there was strong overnight trading volume in 10-year notes.

Copyright Reuters, 2011