* Prices rise as Italian center right gains in Senate
* Bernanke testimony seen supportive for bond purchases
* Treasury to sell $35 billion of 5-yr notes
* Fed bought $3.31 billion in U.S. debt due 2020-2023
By Ellen Freilich
NEW YORK, Feb 25 (Reuters) - U.S. Treasury debt prices rose
and benchmark yields dipped to the lowest level in a month on
Monday as uncertainty over whether Italy would be able to form a
stable government whetted investors' appetite for safe-haven
U.S. debt.
Conflicting early forecasts of the result of Italy's
election raised the specter of deadlock in parliament that could
paralyze a new government and re-ignite the euro zone credit
crisis.
Early reports on voting in Italy's parliamentary election
indicated the center-left coalition led by Pier Luigi Bersani
was ahead of Silvio Berlusconi's center-right bloc, and that
damped demand for U.S. debt, sending prices lower and yields up.
But when polls showed Berlusconi's party gaining, demand for
safe-haven U.S. and German government bonds picked up. U.S.
Treasury prices rose and their yields fell to one-month lows.
"Elections in Italy drove the moves in the U.S. Treasury
market today," said Eric Stein, vice president and portfolio
manager at Boston-based Eaton Vance Investment Managers.
The 10-year note yield posted its biggest one-day drop since
early November (Xetra: A0Z24E - news) . Benchmark 10-year Treasury notes rose
29/32 in price to yield 1.86 percent, the lowest since Jan. 25
and down from 1.96 percent late Friday.
The 30-year bond rose 1-26/32 in price as its
yield fell to 3.06 percent, down 9.3 basis points from Friday,
its biggest one-day drop since June 1.
"The main market driver was Italy with a 'risk-on' appetite
reversing very quickly midmorning," Cantor Fitzgerald Treasury
strategist Justin Lederer said, adding that "equities lost some
or all of their gains and safe-havens went bid."
Italy's center-left coalition held a slim lead over former
Prime Minister Berlusconi's center-right bloc in the election
for the lower house of parliament, three TV projections
indicated on Monday. But any government must also command a
majority in the Senate, a race decided by region. Projections
indicated the center-right was leading in the Senate, but that
no coalition would have enough seats to form a majority in the
upper house.
While following the election news out of Italy, investors
were also looking ahead to semi-annual congressional testimony
from Fed Chairman Bernanke on Tuesday for signs the Fed may end
its bond purchase program sooner than expected.
Some Fed board members have sounded increasingly cautious
about continuing the U.S. central bank's bond purchase program.
That conversation has heightened speculation the Fed may end
the buybacks before year-end.
Stein, and others, said Bernanke's testimony could reassure
bond investors on that score.
"I do expect Bernanke to be very dovish tomorrow and not
show as much concern about the negative effects of quantitative
easing as some of his colleagues have recently," Stein said.
Investors are also focused on an automatic $85 billion in
across-the board spending cuts due on Friday unless lawmakers
reach a deal on avoiding them, which could boost demand for
Treasuries as the deadline nears.
President Barack Obama and others have warned that the
measures will harm the country's still-fledgling economic
recovery.
"Most people seem resigned to the fact that it's probably
going to happen for some period of time," Ira Jersey, an
interest rate strategist at Credit Suisse (NYSE: CRP-CL - news) in New York, said of
the spending cuts, known as sequester. "It might get resolved
within the regular budget process, but it will be on the books
for a few months. The idea that you're going to get a last
minute fix here is less likely than in the past."
The waning days of February have also raised expectations of
"relatively large month-end buying needs," said Stone & McCarthy
market analyst John Canavan. "That helped drive Treasuries
through some key technical levels, which really helped yields
cascade lower," he said.
Treasuries had been mired in narrow ranges for a month
through the end of last week, Canavan said, with the 30-year
yield stuck between 3.13 percent to 3.25 percent. The 10-year
yield, meanwhile, moved between 1.93 percent and 2.06 percent.
"The high end of those ranges was tested last Wednesday, and
the low end was tested on Thursday and Friday before today's
break," he said.
The Treasury sold $35 billion in two-year notes on Monday,
the first auction of a total $99 billion in supply this week.
The government will auction $35 billion in five-year notes on
Tuesday and $29 billion in seven-year notes on Wednesday. All
the auctions settle on Thursday, the last day of the month.
Canavan said demand for the five-year notes could lag
longer-term issues.
The Federal Reserve bought $3.31 billion in debt due 2020 to
2023 on Monday as part of its ongoing bond purchase program
meant to hold down long-term borrowing rates and help reduce the
unemployment rate.
