TREASURIES-Prices jump, swap spreads widen on Europe worries

* Contagion worries in Europe adds safety bids for bonds

* Fed expected to buy around $7 billion in Treasuries

* 2-yr swap spreads reach widest level since July
(Updates market action, adds quotes, changes byline)

By Karen Brettell

NEW YORK, Nov 30 (BestGrowthStock) – U.S. Treasury bond prices were
boosted on Tuesday by a returning bid for safe-haven purchases
as European debt woes spread, though analysts said key economic
data in coming days could dampen demand.

“We’ve seen even more weakness in Europe the
flight-to-quality thing seems to be coming back a little bit,”
said Dominic Konstam, interest rate strategist at Deutsche Bank
in New York.

Benchmark 10-year Treasury notes (US10YT=RR: ) rose 16/32 in
price to yield 2.77 percent. The 30-year bond (US30YT=RR: )
jumped 1-01/32 in price to yield 4.08 percent.

European woes also caused dramatic widening in the two-year
interest-rate swap market as the cost for European financials
to access funding in the U.S. dollar market jumped. For
details, see [ID:nLDE6AT0Z0]

The three-month dollar Libor (USD3MFSR=: ) fixed above 0.3000
pct on Tuesday for first time since Aug. 24. The two-year swap
spread, a confidence gauge of the banking system, widened to
29.50 basis points, its broadest level since mid-July for the
second time in three sessions, from 24.50 basis points late

“The important thing that happened today is that Libor was
set above 30 basis points, which was seen as some kind of
psychological level by the market,” said Amrut Nashikkar,
analyst at Barclays Capital in New York.

“This will probably continue for a bit, but probably not to
the extent it went to in May,” he added.

Federal Reserve debt purchases have also helped to boost
prices this week, while investors purchasing longer-dated
government debt to match the duration of their portfolio
benchmarks through month-end also added a bid.

The U.S. central bank is expected to purchase around $7
billion in bonds maturing between 2014 and 2016 on Tuesday.

Analysts warned, however, that gains could easily reverse
this week as volatility remains high and investors focus on
economic data, including the Friday U.S. jobs report that may
be stronger than expected.

“If the data stays strong or gets stronger, there is a risk
(of yields) to the upside,” said Deutsche’s Konstam.

Bonds gave up some of the earlier gains on Tuesday after a
report showed business activity in the U.S. Midwest grew fast
than expected in November, helped in part by stronger
employment. [ID:nN30220423]

A Reuters poll on Tuesday also showed U.S. fund managers
increased their exposure to stocks and slowly cut back on bonds
for the third month in a row on signs the economic recovery is
strengthening. [ID:nN29202856] and [ID:nLDE69R0FD]

Dealers and major investors including central banks also
reduced Treasury holdings taken ahead of the Fed’s quantitative
easing statement, which may ease selling pressure in the
market, but result in light volumes and increased volatility.

“With the European crisis, institutions are probably
quieting down and balance sheets are being scaled back, so what
you should expect to see is some quite whippy price action,”
Konstam added.
(Additional reporting by Richard Leong; editing by Jeffrey

TREASURIES-Prices jump, swap spreads widen on Europe worries