Yields fall on month-end buying, European bond rally

U.S. Treasurys rallied on Wednesday as European government bond yields continued to plumb record lows and month-end buying helped send 30-year Treasury yields to their lowest levels in over a year.

Tensions in Ukraine added some safety demand for U.S. debt.

State Department spokeswoman Jen Psaki says Russia has sent additional columns of tanks and armored vehicles into its neighbor's territory. She says the incursions suggest a "Russian-directed counteroffensive is likely underway" in the contested eastern cities of Donetsk and Luhansk, The Associated Press reported.

Benchmark 10-year notes rose 11/32 in price to yield 2.36 percent, down from 2.39 percent late on Tuesday. Meanwhile, thirty-year bonds gained 1 3/32 in price to yield 3.108 percent, after touching 3.105 percent earlier, its lowest level since May 2013.

Bonds have gained since European Central Bank President Mario Draghi said last Friday that the bank was prepared to respond with all available tools if euro zone inflation dropped further. Investors took his comments to mean the ECB could start an asset purchase program or other stimulus measures.

Large demand from investors rebalancing portfolios this week is also adding a persistent bid to U.S. debt.

"There is a fairly fierce rally in the European sector which is dragging U.S. yields along with it and month-end buying is ferocious this month because it's a refunding month," said Aaron Kohli, an interest rate strategist at BNP Paribas in New York.

Earlier, Ukraine accused Russian forces of launching a new military incursion across its border on Wednesday, a day after the leaders of both countries agreed to work toward ending a separatist war in eastern Ukraine.

Demand from investors rebalancing their portfolios heading into month-end is likely to hold a bid for bonds through the rest of the week, with intermediate-dated notes likely seen as attractive.

"Those month-end indexers are buying in the five-year and seven-year bucket because the bonds outperformed so much over the course of the last month,'' said Tom Tucci, head of Treasurys trading at CIBC in New York. ``Month-end on Friday is a large extension. That will drive prices for the remainder of the week.''

Further evidence of the region's faltering economy on Wednesday fed market expectations for more stimulus.

Weaker-than-expected consumer confidence in Germany drove the market, together with comments from Italy's economy minister that Rome must lower its economic growth forecast.

``... Europe continues to rally, geopolitical concerns are still out there and there is no data to speak of,'' said Ian Lyngen, senior government bond strategist at CRT Capital in Stamford, Connecticut.

German 10-year yields dipped 2.6 basis points to 0.921 percent, passing the previous record of 0.926 percent hit on Monday.

Foreign central banks and indirect bidders bought 52.71 percent of a $35 billion five-year note issue the U.S. Treasury Department auctioned on Wednesday. That was their biggest percentage purchase in 13 months, Treasury data showed.

The Treasury will sell $29 billion in seven-year notes on Thursday, the final sale in $93 billion of new coupon-bearing supply this week.

Gross domestic product data on Thursday will also be closely watched.

—By Reuters