Treasuries rose, led by shorter-term notes, as traders headed for the safety of U.S. government debt amid escalating tension in the Mideast. The gains pushed yields on Treasuries lower as crude-oil futures prices increased on speculation supplies may be disrupted. Gold also rose. Short-term Treasuries usually outperform longer-term securities as investors seek the most liquid investments in a crisis. “It seems the oil markets responded to the uncertainty -- they rallied,” said Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of 17 primary dealers that trade with the Federal Reserve. “That seemed to support the commodity markets -- they bounced. They all responded to the Mideast tensions. That’s all that the front end of the Treasury market is doing.” The two-year Treasury note yield dropped nine basis points, or 0.09 percentage point, the biggest decline in three weeks, to 0.79 percent at 10:56 a.m. in New York, according to BGCantor Market Data. The 0.875 percent security maturing in December 2010 rose 6/32, or $1.88 per $1,000 face amount, to 100 5/32. The five-year note yield tumbled nine basis points to 1.43 percent, and the 10-year yield decreased four basis points to 2.09 percent. The difference between yields on two-year and 10-year Treasuries widened by five basis points to 1.30 percentage points. The gap had been as wide as 2.62 percentage points Nov. 13, as investors bet the Fed would reduce its 1 percent target rate for overnight bank lending, which it did. ‘Low Volumes’ “Prices are up on very low volumes,” said Adam Brown, director of Treasury trading at Barclays Capital Inc. in New York, another primary dealer. This week will be abbreviated by the New Year’s holiday. The Securities Industry and Financial Markets Association recommends trading of Treasuries close on Dec. 31 at 2 p.m. New York time and stay shut on Jan. 1 for the holiday. Israeli Defense Minister Ehud Barak said his country is fighting a “war to the death” with Hamas, the group that controls Gaza. Oil prices also advanced as China, the world’s second-biggest energy consumer, said it will supplement its emergency oil stockpiles while prices are low. Libya and the United Arab Emirates announced compliance with OPEC output cuts agreed on this month. ‘Something New’ Crude oil for February delivery rose as much as $4.49, or 12 percent, to $42.20 a barrel in electronic trading. Today’s gain pares oil’s plunge from its $147.27 record on July 11 to 74 percent. Crude oil futures prices fell 11 percent last week, reaching a four-year low of $32.40 on Dec. 19. “Compared to the financial crisis and the economy, it’s been a very small factor,” said Barclays’ Brown. “It probably wasn’t priced in. The market is looking for something new. The only thing new is how quickly this escalated.” Treasuries have rallied 14.6 percent this year, according to Merrill Lynch & Co.’s Treasury Master index, the most since 1995. The gain came as the economy entered a recession for the first time since 2001 and financial firms recorded more than $1 trillion in losses while the falling housing market led to a broader contraction in credit markets. The U.S. sold a record $66 billion of two- and five-year notes last week, highlighting the government’s funding needs amid a deepening recession. The securities drew historic low yields as the Treasury faces selling what it has estimated will be as much as $2 trillion in debt this fiscal year, which began Oct. 1. The U.S. marketable debt climbed to a record $5.82 trillion in November from $4.54 trillion a year before. The government, strapped with a swelling budget deficit, needs to finance a bailout of the banking system and an economic stimulus plan that members of President-elect Barack Obama’s transition team said may cost $850 billion. The Treasury auctioned $28 billion of five-year notes on Dec. 23 at a yield of 1.539 percent and $38 billion of two-year notes the previous day at a yield of 0.922 percent.

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