Bonds edge up as Europe doubts linger

"In the near term the market will be driven mostly by Greece rather than US factors," said Yoshio Takahashi, a non-yen fixed-income strategist at Barclays Capital.

European policymakers, stung by criticism over failure to stem the debt crisis, began working on new ways to stop fallout from Greece's near-bankruptcy from inflicting more damage on the world economy, with the focus on beefing up the size of a rescue fund.

Still investors are unsure if the currency bloc's 17 countries and the European central Bank can quickly come to a conclusion, given their history of bickering since Greece's debt problems erupted in 2009.

The 10-year note rose 3.5/32 in price to yield 1.818 percent, compared to 1.83 percent at the end of last week.

Still, most short positions may have already been covered by last week after the Fed's announcement of a bigger-than-expected bond buying programme drove long-term bond yields sharply lower, so the 10-year yield may not fall below the 60-year low of 1.674 percent hit last week, some market players said.

The yield curve flattened as spreads between 10- and 30-year yields shrank further to 105.8 basis points, the smallest in five months, from around 106.8 basis points late last week.

The 30-year bond yield fell 2.3 basis points to 2.875 percent.

One wild card for the market, analysts say, is a deadlock in the US Congress over a bill that would fund government spending past Sept. 30, after it was unexpectedly voted down last week.

Although US policy-makers said they will seek an agreement to keep government operations funded beyond Sept 30, the embarrassing defeat of the bill threw into question the Congress's ability to pass basic laws.

Copyright Reuters, 2011