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Treasurys gain on safety buying as Ukraine tensions rise

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U.S. bonds gained on Tuesday as rising tensions in Ukraine sparked a safety bid for U.S. bonds, and after a weak manufacturing survey for New York state pointed to sluggish economic momentum.

Russia declared Ukraine on the brink of civil war on Tuesday as Kiev said an "anti-terrorist operation'' against pro-Moscow separatists was under way, with troops and armored personnel carriers seen near a flashpoint eastern town.

Concerns over escalating conflict added to bond purchases, after a gauge of manufacturing in New York state earlier grew at a slower rate than the previous month, and below expectations in April.

``It added to the Treasuries rally in the long-end, emerging markets overall are getting hit harder,'' said Michael Chang, an interest rate strategist at Credit Suisse in New York.

Benchmark 10-year notes were up 7/32 in price to yield 2.63 percent, down from 2.66 percent earlier on Tuesday. Thirty-year bonds gained 16/32 in price to yield 3.46 percent, down from 3.50 percent earlier.

Shorter-dated Treasurys yields briefly rose earlier on Tuesday after the Labor Department also said on Tuesday its Consumer Price Index increased 0.2 percent last month as a rise in food and shelter costs offset a decline in gasoline prices.

The CPI index had gained 0.1 percent in February. The data comes as the Treasury is due on Thursday to sell $18 billion in five-year Treasury inflation-protected securities (TIPS).

U.S. inflation-linked bonds have been among the worst performers since the Fed last year indicated that it would begin tapering its bond purchases, with investors worrying over what catalyst will lead inflation higher.

Investors are focused on a busy week of data releases for signs on the strength of the economy as the Federal Reserve pares its bond purchases, and look toward interest rate hikes that most expect to begin next year.

Watch: Play bonds middle of the curve: Pro

Housing data on Wednesday will be evaluated to see if activity picked up, after months of subdued data that many blame on bad weather.

"When the clouds part if we don't get a lift to housing that could be a big issue,'' said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

A Philadelphia manufacturing survey released on Thursday will also be a focus after Tuesday's weak New York report.

Fed Chair Janet Yellen will also speak on Wednesday about the economy. She spoke on Tuesday about markets regulation, but did not discuss monetary policy.

The Fed bought $2.20 billion in notes due 2020 and 2021 on Tuesday as part of its ongoing purchase program.

—By Reuters

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