New York : US two-year notes had their first three-week winning streak since January as demand for the safest assets rose on speculation Europe's sovereign-debt crisis will damp growth and lead to disintegration of the euro.

Treasuries, which fell the most in nine months May 10 after European leaders announced an almost $1 trillion (Dh3.67 trillion) bailout plan, climbed on Friday even as reports showed America's economic recovery is building momentum. The euro dropped to its weakest level since 2008, and stocks plunged. A report this week is forecast to show US consumer prices rose 0.1 per cent in April.

"There is a flight to quality emanating from the issues coming from Europe and the viability of their monetary union going forward," said Christopher Sullivan, who oversees $1.6 billion as chief investment officer at United Nations Federal Credit Union in New York. "The market has looked past the short-term liquidity solution of last weekend and is looking to the long-term structural issues."

Two-year note yields fell 3 basis points to 0.79 per cent, the lowest weekly close since February 5, according to BGCantor Market Data.

The 1 per cent security due in April 2012 increased 1/32, or 31 cents per $1,000 face amount, to 100 13/32. A basis point is 0.01 percentage point.

US 10-year note yields were at 3.45 per cent after trimming a rise for last week to 3 basis points. They gained as much as 18 basis points May 10, the most since August, on the bailout package and fell as much as 12 basis points on Friday.

Yield curve

The difference between yields on 2- and 10-year notes, known as the yield curve, widened to 2.67 percentage points from 2.62 percentage points on May 7.

The Treasury sold $78 billion of 3-, 10- and 30-year securities this week, drawing bids for more than two and a half times the amount on offer at each auction.

The European Union's failure to ease concern some of its nations may default has boosted demand for US securities. The US 10-year note yield touched 3.26 per cent May 6, the lowest since December 2, from an 18-month high of 4.01 per cent April 5.

Treasuries were the world's top-performing bonds in the past month. US notes due in 10 years and longer gained 3.8 per cent on average in the past month, the most of 174 bond indexes after accounting for currency rates, according to data compiled by Bloomberg.

The euro dropped to $1.2354 on Friday, the weakest level since October 2008, as German Chancellor Angela Merkel said Europe is in a "very, very serious situation" even with the bailout package. The Standard & Poor's 500 Index tumbled 1.9 per cent on Friday, paring a weekly rally.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said in an interview with ZDF television that Greece, where the crisis began, may not be able to repay its debt in full without "incredible efforts."

Japan bonds fall

Japanese bonds fell for the first time in more than a month on concern the nation's mounting debt will damp demand at the next two auctions of the securities.

The Finance Ministry will sell a total of 3.5 trillion yen (Dh138 billion) in five- and 20-year bonds this week. Bidding at the 300 billion yen offering of 40-year debt on May 13 slid to the lowest since the tenor was first offered in 2007. "We can't also overlook the underlying fiscal risk in Japan," said Tadashi Matsukawa, a Tokyo-based manager of the fixed-income division at PineBridge Investments Japan Co.

— Bloomberg