LONDON: US debt prices jumped in Europe on Tuesday as mounting turmoil in Libya spurred flight-to-quality trades though further gains may be limited by a fresh round of government debt supply this week.
Ten-year notes rose 18/32 in price to yield 3.503 percent, the lowest since Feb. 1 when an upbeat report on US manufacturing calmed worries of rising inflation. The US market was closed for a public holiday on Monday.
The benchmark 10-year yield has fallen more than 25 basis points from a 9-month high of 3.77 percent hit earlier this month when strong economic data fanned speculation that the Federal Reserve would raise interest rates as soon as the end of this year.
"It's all basically about a flight-to-quality in the market at the moment. The Middle East is still the focus, concerns about money supply, everything else that's going on in Libya," a trader said.
The 2-year note gained 3/32 in price to yield 0.719 percent, down about 4 basis points, while the 5-year T-note yield fell 8 bps 2.191 percent.
Oil prices have climbed to a 2-1/2 year high on views that violence in Libya could cut more of the OPEC's member's output and that unrest could spread to other top oil producers in North Africa and the Middle East.
While a rise in oil prices could stoke inflation fears, some market players say the market may focus its negative impact on consumers.
"I think it dawns on market players that higher oil prices are negative for the economy, as was the case in early 2008," said a fund manager at a US asset management firm.
Market focus was also on this week's debt auctions. The Treasury will sell a total of $99 billion of two-, five- and seven-year notes, including a $35 billion two-year note sale later in the day.
Some market players said the growing likelihood that the Treasury will cut the supply of T-bills to avoid hitting the US debt ceiling and the latest bout of safe-haven buying may help whet investor appetite.
"There should actually be quite good demand for the 2-year but it's not actually anything to do with people's views on rates, on the economy, on the Fed, it is a technical thing to do with the lack of available bill supply," Marc Ostwald from Monument Securities said.
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