May 30, 2012 / 12:47 AM / 5 years ago

Europe fears drive U.S. bond yields to 60-year low

A man passes a screen showing the activity of the FTSE index at Canary Wharf financial district in London August 5, 2011.Luke MacGregor

NEW YORK (Reuters) - Benchmark U.S. Treasury yields fell to their lowest levels in at least 60 years on Wednesday, while stocks and commodities sold off as fear of the euro zone's debt crisis gripped investors.

The euro fell below $1.24 to a fresh 23-month low against the dollar after Italian borrowing costs soared, and concerns mounted over Spain's banking sector following a caution by its central banker that Madrid will miss deficit targets for this year. Crude oil prices fell 3 percent.

In equity markets, the three major indexes on Wall Street closed down more than 1 percent each. Pan-European and global share indexes also lost more than 1 percent apiece.

Spain's stock market hit a nine-year low as the country's borrowing costs rose to near the 7 percent level that had forced other euro-zone nations to seek bailouts.

"You're seeing the deterioration in Spain gain magnitude and that is worrisome because it involves a larger bailout (than Greece's) and far more capital to alleviate banking problems," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

"Traders and long-term investors believe Europeans are working on solutions. But the ultimate question is, 'Will capital markets give them the time before a liquidity issue becomes a solvency issue?'"

GREEK POLLS CLOUDY; SPANISH STOCKS LANGUISH

In Greece, the outcome of an election next month that may decide whether it remains in the euro was still uncertain as polls showed parties for and against a bailout neck-and-neck.

At the close, the Dow Jones industrial average .DJI was down 160.83 points, or 1.28 percent, at 12,419.86. The Standard & Poor's 500 Index .SPX was down 19.10 points, or 1.43 percent, at 1,313.32. The Nasdaq Composite Index .IXIC was down 33.63 points, or 1.17 percent, at 2,837.36.

The benchmark 10-year U.S. Treasury note was up 7/32 in price, with its yield of 1.620 percent falling to its lowest in at least 60 years, based on monthly figures gathered by Reuters.

European stocks, tracked by the FTSEurofirst 300 index .FTEU3, fell 1.5 percent to close at 975.74, after trading 105 percent of its 90-day volume average. The blue-chip Euro STOXX 50 .STOXX50E, which fell 2 percent, traded 70 percent of its volume average.

Spain's Ibex 35 .IBEX index fell as much as 2.9 percent to a session low at 6,073.70, its lowest since 2003.

People look at a stock quotation board outside a brokerage in Tokyo May 24, 2012.Kim Kyung-Hoon

MSCI's all-country world equity index .MIWD00000PUS shed 1.66 percent.

The yield on Spain's 10-year benchmark note was at 6.675 percent. Italy's funding costs rose sharply at a bond sale, with 10-year yields topping 6 percent for the first time since January.

The euro was last down 1 percent at $1.2367 after touching $1.2360 earlier, its lowest level since early July 2010. The euro also fell against the safe-haven yen, losing nearly 1.5 percent to trade near 97.82 yen, a four-month low.

ONLY "BAND-AID" SOLUTIONS FROM EUROPE

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"Uncertainty remains high and headline risk is likely the key driver," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto. "The fear is that we only have Band-Aid solutions, and we still don't have a medium-term plan for Europe."

The European Commission threw Spain two potential lifelines, offering more time to reduce its budget deficit and offering direct aid from a euro-zone rescue fund to recapitalize distressed banks.

The euro's weakness underpinned the dollar index .DXY, which measures the dollar against a basket of major currencies. The index hit a session high above 83.1, its highest level since September 2010.

The rise in the dollar, as well as fears about the European debt crisis, dragged down commodities. Copper and platinum both sank to 4-1/2-month lows as investors piled into safe havens. <MET/L>

"As we've seen during other periods of extreme risk aversion, investors go into Treasury bonds, which are yielding record lows, or they stay in cash. It's preservation of capital," said analyst Robin Bhar at Societe Generale in London.

London's benchmark Brent July crude fell $3.21 to settle at $103.47 a barrel, breaching the $105 support level. U.S. July crude in New York lost $2.94 to finish at $87.82, or under the $90 support mark. <O/R>

Gold, an alternative play to the dollar, was down 0.5 percent in late New York trade at below $1,564 an ounce. <GOL/>

Arabica coffee closed at a 21-month low while U.S. cotton finished at a 27-month bottom. <SOF/L> <COT/N>

Additional reporting by Richard Hubbard in London; Editing by Leslie Adler, Dan Grebler and Jan Paschal

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