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Bonds Jump as Italy Election Roils Markets

U.S. Treasury debt prices rose and benchmark yields dipped to the lowest in a month on Monday with safe-haven demand as Italian exit polls reflected uncertainty over whether the country would be able to form a stable government.

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. Demand for safe haven U.S. debt had waned early in the trading session after first reports of voting in Italy's parliamentary election showed that the center-left coalition led by Pier Luigi Bersani was ahead of Silvio Berlusconi's center-right bloc.

That reversed after polls showed Berlusconi's party gaining, sparking demand for safe haven U.S. and German government bonds.

"Overall the main market driver was Italy with a 'risk-on' appetite reversing very quickly midmorning," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York, adding "equities lost some or all of their gains and safe-havens went bid."

Benchmark 10-year Treasurys notes were trading 19/32 higher in price to yield 1.89 percent, marking the lowest since Jan. 25 and down from 1.96 percent late Friday.

Thirty-year Treasurys were trading 1-2/32 higher to yield 3.10 percent, down from 3.15 percent late Friday.

While following the election news out of Italy, investors were also looking ahead to testimony from Federal Reserve Chairman Ben Bernanke on Tuesday for any signs the Fed may end its bond purchase program sooner than most expect.

Indications some Fed board members are increasingly cautious about continuing the U.S. central bank's bond purchase program have heightened speculation the Fed may end the buybacks before year-end.

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 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," said Ira Jersey, an interest rate strategist at Credit Suisse in New York.

"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 I think is less likely than in the past."

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.

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.

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