Treasurys rose, with the yield on the 30-year bond dropping from almost the highest level in more than a week, amid concern Greece may default on its debt.

The yield on the 10-year note fell after a report that Greece's Prime Minister Lucas Papademos requested the country's finance ministry to prepare a document on the implications of a Greek default. Treasurys fell earlier before an auction of $32 billion in three-year notes tomorrow. The Federal Reserve purchased $1.8 billion in long-term Treasurys today.

"The odds of a Greek default have been increased as of late," said Kevin Flanagan, a Purchase, New York-based fixed- income strategist for Morgan Stanley. "Anytime you get those negative headlines, it provides a bid to Treasurys."

The 10-year note yield declined three basis points, or 0.03 percentage point, to 1.89 percent at 3:28 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent securities due in November 2021 rose 1/4, or $2.50 per $1,000 face amount, to 100 30/32.

The 30-year bond yield lost four basis points to 3.08 percent after earlier reaching 3.14 percent. On Feb. 3 the yield touched 3.16 percent, the most since Jan. 25.

Fed's Holdings
The Fed is replacing $400 billion of shorter-maturity Treasurys in its holdings with longer-term debt to cap borrowing costs and spur the economy under a program it plans to conclude in June. The central bank today purchased securities maturing to from February 2036 to May 2041 as part of the plan, according to the New York Fed's website.

The U.S. begins its first of three auctions this week tomorrow with the three-year note sale, followed by $24 billion of 10-year debt on Feb. 8 and $16 billion of 30-year bonds the next day. The U.S. previously auctioned three-year notes on Jan. 10 at the highest demand on record. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 3.73, the highest since at least 1993 when the government began releasing the data. The notes drew a yield of 0.37 percent, near the record low of 0.334 percent reached at the sale in September. The note traded today at 0.317 percent.

"Supply is definitely on the radar," said Justin Lederer, an interest-rate strategist at primary dealer Cantor Fitzgerald LP in New York. "It's always tricky to gauge where the auctions will go. The 30-year is always the wild card."

Yield Difference

The difference between yields on 10-year notes and 30-year bonds may widen as investors prepare for a sale of the longer maturities on Feb. 9, Barclays Plc said today in its market- outlook report. The spread widened to 1.22 percentage points on Feb. 3, the most since September, according to data compiled by Bloomberg. The gap was at 1.19 percentage points today.

Treasurys halted declines from last week as European officials maintained pressure on Greece to accept terms demanded by international lenders during a weekend of talks to avert a financial collapse.

"Fitch expects Greece to undertake an orderly debt restructuring, which would ensure that a payment system is in place," the ratings company said in a statement today. "However, a disorderly default, which may include an exit from the euro zone, cannot be wholly discounted."

The Greek prime minister yesterday told the leaders of the three political parties supporting his interim government that he asked the ministry "to record accurately and realistically all the consequences of the country's exit from the euro zone," Panos Beglitis, spokesman for the socialist Pasok Party, said today in an interview with Radio 9, according to a transcript of his comments e-mailed from the Athens-based offices of Pasok.

Greek Debt

"What's going on in Greece underlines the difficulty and risk the euro region is still facing in order to sort out its debt problem, and that is supporting demand for highly rated government bonds," said David Schnautz, a fixed-income strategist at Commerzbank AG in London. "Treasury yields should have been higher because of the improving U.S. economic outlook, but risk aversion is keeping them low."

U.S. government bonds tumbled on Feb. 3 after the Labor Department said employers added 243,000 jobs in January. The median forecast of economists in a Bloomberg News survey was for 140,000. The jobless rate declined to 8.3 percent, the lowest level in three years.

Federal Reserve Bank of St. Louis President James Bullard said holding interest rates at almost zero to counteract a high degree of slack in the U.S. economy may be a costly mistake.

Better-than-forecast data on the economy such as the unemployment rate indicate that more Fed purchases of bonds, known as quantitative easing, aren't necessary, Bullard told reporters after his speech. He was the first Fed official in 2010 to call for a second round of asset purchases.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net.

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net.

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