* 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. Treasury debt prices rose on Monday on safe haven demand heightened by investor caution over turmoil in the Middle East and growing geopolitical tension following the downing of a Malaysian Airlines aircraft.
Yields, which move inversely with prices, on U.S. 30-year bonds fell to their lowest since June 2013.
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 yields of 2-year notes and 10-year bonds, contracting on Monday to its narrowest since June last year.
“The buying in Treasuries is possibly geopolitical,” said Jonathan Rick, rate derivative strategist, at Credit Agricole in New York. “We had the aggressive move on Thursday, then we had the sell-off on Friday, so this might have been just a reversal from that sell-off.”
The latest headlines on the fighting in Gaza continued to be dire. Israeli forces killed 10 Palestinian militants who slipped across the border from Gaza through hidden tunnels on Monday, the military said, as the death toll from the two-week conflict passed 500 amid growing international calls for an end.
In Ukraine, fighting flared in the eastern city of Donetsk on Monday as investigators began to inspect the bodies of victims of the downing of Malaysia Airlines flight MH17 last week.
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 flattening is something we expected,” said Agricole’s Rick. “As we’re moving toward a Fed rate hike next year, you kind of expect the front end to kind of unhinge.”
Benchmark 10-year U.S. Treasuries were up 8/32 in price to yield 2.451 percent, while the 0-year Treasury bond was up 25/32 in price, pushing the yield down to 3.251 percent . It fell as low as 3.249, the lowest since June 2013. (Editing by W Simon)