Short-term Treasurys rally

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NEW YORK (Reuters) -- Short-dated U.S. Treasurys rallied on Friday, sending two-year yields to 11-month lows, as investors sought the safety of government bonds on fears that this year's stock market recovery had finally come to end.

A day after the S&P's worst one-day percentage fall in three weeks, stock futures pointed to another dismal day on Wall Street, reigniting a bond market rally that had appeared to be on its last legs earlier this week.

Some analysts have wondered if the stock market losses amounted to a temporary retreat as traders booked profits early for the year-end, but for the moment dealers said safe-haven flows into shorter dated debt was the dominant flow.

"The tone is set for a bid to fixed income markets," said Christian Cooper, an interest rate strategist at RBC Capital Markets. "The front end is going to outperform today. The pain trade is that the front end continues to rally.

"We're going to continue to see a bounce of short covering and a reallocation of cash to the front of the curve."

The two-year Treasury note's price was last up 1/32 for a yield of 0.69%. Earlier in the session, it fell just below 0.68%, its lowest since December 2008.

Five-year notes performed particularly well, rising 4/32 for a yield of 2.13% versus 2.15% at Thursday's close.

The short-end rally was all the more surprising coming after Thursday's Treasury Department announcement that it will sell $118 billion worth of two-, five- and seven-year notes next week.