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Prices rise on Fed expectations, Europe worries

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U.S. sovereign bond rose on Monday on worries about Europe's drag on the U.S. economy and more bets the Federal Reserve might not raise interest rates until late 2015.

Safe-haven demand stemming from anxiety over the spreading of the Ebola virus and fighting in the Middle East have persisted to keep benchmark yields not far above 2 percent.

"Both the Ebola scare and the expansion of ISIS have added jitters to the market and fear bids into the bond market," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.

Short-term interest rates futures implied traders do not expect the U.S. central bank to raise rates from its near zero percent until late 2015.

"We feel the earliest is fourth quarter of next year when the Fed will take any action on rates," said Sean Simko, head of fixed-income management at SEI in Oaks, Pennsylvania.

Amid the volatile trading last week, a few top Fed officials suggested the U.S. central bank may want to consider prolonging its third round of quantitative easing in a bid to support the domestic economy. Those comments surprised the market as the consensus view has been the Fed would decide to wrap up its bond purchases for QE3 at its Oct 28-29 policy meeting.

Early Monday, Dallas Federal Reserve President Richard Fisher told CNBC television last week's turbulent trading should not stop the Fed from ending QE3.

In the meantime, German business software maker SAP's downgrade of its profit outlook, together with recent weak regional economic data, intensified anxiety about the resilience of the euro zone's largest economy. This pushed European stock values lower and stoked early safety bids for low-risk U.S. government debt.

Bond yields retraced from their earlier session lows as the three major Wall Street indexes turned higher, brushing off disappointing results from from IBM, a Dow component.

Benchmark 10-year Treasury notes were last up 5/32 in price with a yield of 2.178 percent, down 2 basis points from late on Friday. The 10-year yield fell to an earlier low of 2.160 percent.

On Friday, data out of the U.S. showed that national housing starts and permits rose in September and consumer sentiment in early October rose to a seven-year high, both signaling a strengthening in overall economic growth.

This week, investors will be watching for more economic news with existing home sales data on Tuesday and CPI inflation data Wednesday. Currently, the Fed is expected to make the first rate hike mid to late 2015 if economic data continue to show an improvement in the economy.