US Treasurys Rise on European Bank Fears

Even Muni Bonds May Be Targeted in 'Fiscal Cliff' Talks

U.S. Treasurys prices rose on safety buying after the head of the Eurogroup of finance ministers said that bailout deal for Cyprus may be a template on how to resolve high bank debt in other countries in the region, raising concerns about potential bank runs.

While Cyprus's bailout overnight calmed some fears about the festering euro zone debt crisis, traders remained wary about fiscal problems in Spain and Italy whose economies and banking systems are many times larger than the banking system in Cyprus.

Dutch Finance Minister Jeroen Dijsselbloem said in an interview with Reuters and the Financial Times that three years of governments and taxpayers bearing the costs and providing the back stop had to stop.

(Read More: Cyprus Rescue a Model for Europe)

"The Dutch finance minister has made an issue that was specific to Cyprus systemic, by saying it would be a template for future restructurings," said Richard Gilhooly, interest rate strategist at TD Securities in New York.

Cyprus reached a last-ditch deal with international lenders to avoid an economic meltdown by agreeing to close down its second-largest bank and inflict heavy losses on bondholders and big depositors.

Treasurys pared price gains later in the afternoon after the Eurogroup said in a statement that Cyprus is a specific case and that it doesn't use models or templates in programs for each country in the region.

(Read More: Will the Cyprus Deal Take the Euro Far?)

Benchmark 10-year notes were last up 7/32 in price to yield 1.91 percent, up from a low of 1.90 percent. The debt's yields earlier rose as high as 1.97 percent on optimism over the Cyprus agreement.

"There's fear they are going after the depositors. The market thinks this is the wrong approach. This could cause a significant problem for banks," Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.

The 30-year bond rose 13/32 in price to yield 3.14 percent, after earlier rising as high as 3.19 percent.

Supply in Shortened Week

The week's $99 billion in longer-dated Treasury supply and any encouraging domestic economic data should exert some downward pressure on the bond prices with moves exaggerated by a shortened trading week ahead of the Easter holiday, analysts and traders said.

The U.S. Treasury Department will kick off the week's supply with a $35 billion auction of two-year notes on Tuesday; a $35 billion sale of five-year debt on Wednesday and $29 billion auction of seven-year notes on Thursday.

The U.S. bond market will close at 2 p.m. on Thursday and shut for the Good Friday holiday.

Supply-related selling should be mitigated by buying from fund managers for quarter-end rebalancing and four purchase operations from the Federal Reserve this week, analysts said.

The U.S. central bank bought $1.46 billion in government debt due in Feb. 2036 to Feb. 2043 at 11 a.m.

Moreover, the Fed's affirmation of its commitment to hold short-term interest rates near zero after its policy meeting last week will limit the rise in Treasury yields.

"Status quo will reign over the next few months," said Tom Graff, portfolio manager at Brown Advisory in Baltimore.

US Treasury Yields

US 10-YR
US 30-YR