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The flight to safety of U.S. Treasuries triggered by the European sovereign debt crisis is expected to ease the way for Washington to borrow $70-billion (U.S.) this week.

Three U.S. Treasury auctions are scheduled - $36-billion in three-year Treasuries on Tuesday; $21-billion in 10-year notes on Wednesday; and $13-billion in 30-year bonds on Thursday - and they are expected to go well.

The cost of government borrowing is low, even for the longer-term debt. The yield on 10-year U.S. Treasuries has fallen to 3.2 per cent from almost 4 per cent in early April, making it the third time the yield has been at this low level during the past 12 months.

The yield on the 10-year U.S. Treasuries remains well above the 2.1-per-cent level it reached at the height of the credit crisis in late 2008, but well below the average yield of 4.4 per cent over the past 10 years. It reached a high of 6.2 per cent in mid-2000.

What are the expectations?

U.S. government bond yields are expected to remain low, given the sovereign debt problems facing Europe and the risk that that poses to European banks holding the debt of stressed countries. Slow economic growth in the United States will also help to keep interest rates low by holding inflation pressures down.

Domestically, the U.S. government is also stepping into a bond market largely absent of competing borrowers. Private sector borrowing is so exceptionally weak that high levels of government issuance can occur without driving bond yields higher, Derek Holt, vice-president of Scotia Capital Inc., said in a report to clients. "Overall economy-wide borrowing by all sectors of the U.S. economy remains in net debt-retirement mode," he said. The seasonally adjusted annual borrowing rate peaked at over $5-trillion before the credit crisis in 2008, according to Scotia Capital.



How will the market react?

"We expect the 10-year to trade [in a narrow]3.2-per-cent to 3.4-per-cent range for the next several weeks as supply concerns [excessive borrowing by the U.S. government]are offset by deflationary pressures," said Steven Ricchiuto, the chief economist with Mizuho Securities USA Inc.

For now, the appetite for U.S. Treasuries should remain healthy, said Stewart Hall, a currency and fixed-income strategist with HSBC Securities (Canada) Inc. One of the strengths of the U.S. Treasury market is its liquidity. "The U.S. market allows you to get in and out in considerable size," he said. "Although the yields are low and not tantalizing, there seems to be sense the U.S. will get its funding without too much difficulty."

The demand for U.S. Treasuries should remain firm until some confidence returns to the European market, at which point you could get a quick pickup in U.S. yields as investors "push back from the table," he said.



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