Treasurys rise for first day in five

NEW YORK (MarketWatch) � Treasury prices rose Wednesday, pushing long-term yields down for the first day in five, after the government�s auction of 5-year notes and as concerns about Europe weighed on investors appetite for riskier assets.

Yields on 10-year notes 10_YEAR �, which move inversely to prices, fell 6 basis points to 2%, after trading near the highest level in a month in the prior session.

A basis point is one-hundredth of a percentage point.

Click to Play Euro-zone continues to contract

The euro zone's composite purchasing managers index for February shows a sharp drop, raising fears that the region's economy is contracting.

Thirty-year yields 30_YEAR �slipped 6 basis points to 3.15%, off their highest level since October.

Five-year yields 5_YEAR �declined 5 basis points to 0.86%, from their highest level since late December.

�A sense of caution continues to pervade European markets ever since the Greek deal,� said Bill O�Donnell, head of Treasury strategy at RBS Securities, referring to European ministers� agreement to extend a second bailout to debt-strapped Greece.

�Markets are also asking the next obvious question about Portugal and Ireland� � nations that previously took bailout funds and may now ask for more favorable terms, he said. See blog on Europe�s impact on global bond outlook.

Treasury bonds have sold off recently as stocks gained thanks to optimism about a deal for Greece as well as fading worries the country could default on its debt. The Dow Jones Industrial Average DJIA �on Tuesday touched the 13,000 level for the first time on an intraday basis since May 2008.

That U.S. stock markets stand poised near key highs �may argue for a pause in the recent rise in Treasury yields,� O�Donnell said.

U.S. stock indexes struggled Wednesday, showing modest losses in afternoon trading. Read story on U.S. stocks.

Effect of rising oil prices

Treasurys held their gains after a report showed sales of existing homes rose 4.3% in January. See story on existing homes sales.

Bond analysts have also noted the rise in crude-oil futures, which may weigh on consumer spending as gasoline prices rise.

�A continued rise in the oil complex would be a challenge to risk assets, a hit to consumption, and a boost to Treasurys,� O�Donnell said.

On the flip side, rising crude is also pushing inflation expectations up slightly, though not to any extremes. Rising inflation is a threat to bond investors because it reduces the value of their fixed payments. See blog on inflation expectations.