Bonds up with safe-haven bid
Treasurys rise during light post-holiday trade.
NEW YORK (Reuters) -- Prices for short-term U.S. Treasury debt rose Monday as a safe-haven trade in effect for more than a year, reinforced by escalating tensions in the Middle East, persisted into year-end.
Treasurys, stocks, oil and gold rose as Israeli warplanes hit the Hamas-ruled Gaza Strip for a third day and Israel prepared to launch a possible invasion.
"Whenever you have international events of the sort that we saw over the weekend, dollar assets tend to fare well - especially safe-haven assets like Treasurys," said David Resler, chief economist at Nomura Securities in New York.
Resler said the bid for Treasurys was also "simply a continuation of this yearlong flight to quality.
"No one wants to be very exposed to risky positions at year-end," he said.
IDEAglobal bond strategist Josh Stiles also cited year-end factors as giving a boost to Treasurys in light trade.
Economic data later in the week are also expected to bear out the well-established picture of an economy in recession, Stiles noted, a fact that keeps the safe-haven bid for U.S. government debt percolating.
Volume was light with many traders on vacation this week. The market will be shut on Thursday for New Year's Day.
Benchmark 10-year Treasury notes rose 10/32 in price while their yields, which move inversely to prices, eased to 2.10% from 2.13% late Friday, not far above a 50-year low of 2.04% reached last week.
Two-year notes rose 7/32 in price for a yield of 0.78% from 0.91% late Friday.
Thirty-year bonds slid 22/32 in price for a yield of 2.63% from 2.61% late Friday.
The long bond has delivered total returns of nearly 45% year-to-date. It is heading for its strongest performance since 1982 as investors bet that inflation may soon turn to deflation, at least briefly, and the economy is experiencing its biggest shock in at least a generation.
Interbank lending rates fell and measures of money market stress eased on Monday as cash injections from central banks and interest rate cuts in the face of the global economic downturn helped to calm investors.
The spread of London interbank offered rates (Libor) for 3-month dollar funds over anticipated policy rates fell to its lowest since the immediate post-Lehman period and 3-month euro and sterling Libor rates were once again fixed lower, having fallen every session since early October.
Analysts said the flood of central bank liquidity and myriad government banking guarantees throughout the fourth quarter have ensured there's sufficient cash sloshing around the system to bring down lending rates, even though banks are finding alternative methods of funding to traditional interbank markets.
"There's a continued improvement on paper at least and a little bit of confidence creeping back in," said Calyon rate strategist David Keeble.
"But what is key is that banks are finding other ways to fund themselves, the whole interbank market is being substituted: Government guaranteed debt issuance will no doubt be back to being issued hand over fist in January, banks are getting more efficient at using the repo markets and central banks are expanding their balance sheets."
Three-month dollar Libor rates eased just under a basis point to 1.458% at Monday's fixing by the British Bankers' Association. Rates are seen falling markedly as the key end-of-year period passes and as bold moves by central banks gain traction. The Federal Reserve on Dec. 16 cut its target rate close to zero and shifted toward an outright quantitative easing policy.
The 2-year U.S. swap spread - a gauge of counterparty risk and thus financial system stress - has now shrunk almost 40 basis points since the Fed slashed rates to virtually zero two weeks ago and said it would boost its balance sheet to help the economy. 
