TREASURIES-Bonds rise on bank write-down worries

* Bank write-down, economic worries revive safe-haven bids
By Richard Leong

NEW YORK, June 1 (Reuters) - U.S. Treasury prices rose on Tuesday as fears of hefty writedowns by European banks sparked new worries about global economic recovery and unleashed demand for safe-haven bonds.

Treasuries came off earlier highs in reaction to better-than-expected U.S. manufacturing and construction data that allayed some concerns of the contagion effect on the United States from the euro zone's sovereign debt crisis.

"Treasuries and the dollar remain the safe haven because the euro zone problem will not go away any time soon," said Frank Cholly Sr., a senior market strategist at Lind Waldock in Chicago.

The European Central Bank warned on Monday euro zone banks could write down another $239 billion (195 billion euros) to the end of 2011 in the latest wave of losses stemming from the financial crisis. For more, see [ID:nLAG006303]

Concerns over another crisis in the banking sector were compounded by data signaling slowing manufacturing growth in Europe and China. In the United States, a revival in the factory sector due to overseas demand and inventory restocking has helped to lead an economic rebound over the past three quarters. For more, see [ID:nLDE6500WD]

Treasuries benefited from this uneasy and volatile climate, kicking off June in positive fashion after a solid May.

Benchmark 10-year Treasury notes US10YT=RR are up 7/32 in price according to Reuters data compared with Monday's closing levels based on overseas trading. The U.S. bond market was closed on Monday for the Memorial Day holiday.

Ten-year yields, which move inversely to price, were 3.28 percent, down 2 basis points from late Monday.

Earlier, 10-year notes were up as much as 22/32 and yielding 3.23 percent.

GOOD MAY FOR TREASURIES

Treasuries' good start in June followed their best month in more than a year. According to Barclays Capital, its Treasury total return index rose 1.71 percent last month, the biggest monthly gain since a 2.18 percent increase in March 2009.

U.S. government debt also fared better than European and Asian counterparts, which rose 1.51 percent and fell 0.84 percent, respectively, Barclays' data showed.

Bonds hung in positive territory, despite the U.S. stock market rebounding from opening losses in the aftermath of encouraging construction and manufacturing data.

In the currency market, the euro EUR= recovered from a 4-year low against the dollar in the wake of these reports. See [.N] and [FRX/]

The Institute for Supply Management said its May reading on U.S. manufacturing activity fell to 59.7 in May from 60.4 percent in April. Analysts had predicted a May figure of 59.0.

An ISM reading higher than 50 signals the factory sector is expanding. The April reading was the highest in almost six years. For more, see [ID:nEAP101100]

Meanwhile, the government reported construction spending rose 2.7 percent in April, the biggest monthly increase since August 2000. For more, see [ID:nCAT005273]

While these data suggest the U.S. economy is standing up to the crisis in Europe, investors' preoccupation with growing risks from the problems across the Atlantic remains the dominant force in moving all markets, analysts said.

"There is still tremendous uncertainty out there. As far as risk appetite, it's benign at best," said Todd Schoenberger, managing director at LandColt Trading in San Antonio, Texas.

As risk aversion lessened, the two-year swap spread USD2YTS=RR USD2YTS=TWEB -- a gauge of financial system stress -- shrank to 46.00 basis points from 46.50 basis points late Monday after widening to 52.25 basis points earlier.

(Reporting by Richard Leong; Editing by Andrew Hay)

From Reuters published on June 1 2010