TREASURIES-Bond prices gain as Ukraine, Gaza drive safety bid

Mon Jul 21, 2014 3:43pm EDT

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(Updates prices, adds comment)

* U.S. 30-year bond yield falls to lowest since June 2013

* Geopolitics still very much a factor in the Treasury market

* Yield curve continues to flatten

By Gertrude Chavez-Dreyfuss

NEW YORK, July 21 (Reuters) - U.S. long-term Treasury debt prices rose on Monday on safe-haven demand increased by investors' caution over turmoil in the Middle East and growing geopolitical tension following the downing of a Malaysian Airlines aircraft in Ukraine.

U.S. 30-year bond yields, which move inversely with prices, fell to their lowest in more than a year.

Investors were also bracing for an interest-rate hike from the Federal Reserve next year, with the gap between short- and long-term interest rates, mainly the spread between the yields of 2-year notes and 10-year bonds, shrinking on Monday to its narrowest since June last year.

"The buying in Treasuries is possibly geopolitical," said Jonathan Rick, rate derivatives strategist at Credit Agricole in New York. "We had the aggressive move on Thursday, then we had the selloff on Friday, so this might have been just a reversal from that selloff."

The latest headlines on the fighting in Gaza were still dire. The Palestinian death toll in an Israeli offensive in the Gaza Strip jumped to more than 500 on Monday, as the United States, alarmed by escalating civilian bloodshed, took a direct role in efforts to secure a cease-fire.

Following the crash of Malaysia Airlines Flight MH17 last week that resulted in the death of 298 passengers and crew, Western governments have threatened Russia with stiffer penalties for what they say is its backing of pro-Russian militia who, their evidence suggests, shot the plane down. Russia, in response, challenged the United States to provide proof that pro-Russian troops were involved.

Aside from geopolitics, the other big story in the Treasury market is the flattening of the yield curve.

The spread between the yields of 5-year notes and 30-year bonds also fell on Monday to its narrowest since February 2009.

"The Treasury market is somewhat bifurcated insofar as the front end is tied to policy expectations, and as we move closer to the first hike, 2- and 3-year yields continue to grind higher," CRT Capital said in a research note.

"On the other hand, whereas traditionally flight-to-quality moves have favored the front end of the curve, in recent weeks, the pattern has shifted to favoring 10s and 30s."

The benchmark 10-year U.S. Treasury note was up 2/32 in price to yield 2.474 percent, while the 30-year Treasury bond was up 17/32 in price, pushing the yield down to 3.264 percent. The long bond's yield fell as low as 3.249 percent, the lowest since June 2013. (Editing by W Simon and Jan Paschal)

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