Treasuries gained, pushing 10-year note yields to the lowest level since December, as Europe’s debt crisis worsened and the Federal Reserve squelched speculation it would provide more stimulus while the economic recovery slowed.

Rates on one- and three-month bills turned negative as investors sought a refuge in the world’s safest securities. The Treasury attracted higher-than average-demand at this week’s three note and bond auctions even after Moody’s Investors Service and Standard & Poor’s said the U.S. may lose its top credit ratings as deficit reduction talks stall. Republican lawmakers plan a vote on raising the debt limit next week.

“We’re seeing risk aversion,” said Dan Mulholland, a trader in New York at Royal Bank of Canada, one of the 20- primary dealers that bid on Treasury auctions. “There’s still a lot of uncertainty surrounding Greece and Italy and how those situations will pan out.”

The 10-year note yield fell 12 basis points, or 0.12 percentage point, this week to 2.91 percent, according to Bloomberg Bond Trader prices. The yield dropped as low as 2.81 percent on July 12, the least since Dec. 1. The price of the 3.125 percent security due in May 2021 rose 1 1/32, or $10.31 per $1,000 face amount, to 101 27/32.

Rates on one- and three-month bills closed the week at 0.005 percent as investors were willing to forgo returns in order to preserve their principal.

Treasuries rose for a second consecutive week as Moody’s lowered Ireland’s credit rating to junk, fueling concern that the European sovereign-debt crisis will spread beyond the three nations that already receive bailouts and damp investors’ appetite for higher-risk assets. Greece was downgraded to CCC by Fitch Ratings, the lowest grade for any country, and three steps above default.

The 10-year borrowing costs for Italy and Spain surged this week to the highest since the introduction of the euro in 1999. Italian notes rose as high as 6.02 percent and Spanish bonds climbed to 6.31 percent. The cost of insuring Irish and Portuguese government bonds also hit records this week, implying a 60 percent chance of default.

“Given the uncertainty about what’s going on in Washington and Europe,” investors want to hold Treasuries, said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas SA, one of 20 primary dealers that trade directly with Federal Reserve. “There’s a very strong backdrop for lower rates.”

Treasuries dropped briefly yesterday after Standard & Poor’s followed Moody’s Investors Service in saying it may cut the AAA rating of the U.S. as lawmakers hold debt reduction talks. The U.S. House plans a vote next week on a measure that would raise the government’s debt limit by $2.4 trillion, cut spending, cap government expenditures and propose a balanced-budget constitutional amendment, Republican lawmakers Sean Duffy and Billy Long said.

“To the extent that the U.S. is downgraded, to the extent we don’t see a $4 trillion package, then it’s the long-end that’s going to get hurt the most,” Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said on Bloomberg Television’s “Surveillance Midday” during an interview with Tom Keene. “Ultimately the U.S. has a big, big problem.”

Fed Chairman Ben S. Bernanke, during semi-annual testimony before Congress, tempered expectations that the central bank will resume buying bonds as criticism from Republican senators highlighted the potential backlash to additional monetary stimulus.

The Fed completed $600 billion in purchases of Treasuries on June 30. Policy makers continue to reinvest proceeds from interest payments and maturing securities back into Treasuries to maintain the level of cash in the banking system.

The U.S. government has said it has until Aug. 2 before its ability to make payment on $14.3 trillion of debt expires.

The debt ceiling dispute and weaker-than-forecast economic data pushed Treasuries higher even as the U.S. sold $66 billion in debt this week, starting with $32 billion in three-year notes on July 12, $21 billion in 10-year notes the next day and $13 billion 30-year bonds on July 14.

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