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imageNEW YORK: US Treasuries prices rose on Monday in light and choppy trading after a solid two-year auction as falling oil prices stoked demand for longer-dated bonds.

Strong investor demand at the Treasury's $26 billion two-year debt sale surprised many investors who expected short-dated issues to be under pressure after the Federal Reserve raised interest rates earlier this month.

"Going into the auction people were falling into the trap that the two-year is the most susceptible to the Fed hike, but that wasn't the case," said George Goncalves, head of US rates strategy at Nomura Securities International in New York.

The yield on two-year notes reached 1.04 percent overnight, marking the highest level since May 2010, in a move traders attributed to year-end light volume and market choppiness.

"If you look at the composition of the surprisingly strong demand today, it suggests there were large pools that just had to be allocated by year-end," said Goncalves.

Although traders expect to see low trading volume this week as investors typically shy away from making big trades at the end of the year, they expect to see more interest in the Treasury's $35 billion sale of five-year notes on Tuesday and a $29 billion sale of seven-year notes on Wednesday.

By the end of the week the Treasury will have sold $90 billion to raise $21.2 billion in new cash.

"This week, there'll be a cross current between higher yields enticing buyers versus year-end illiquidity and uncertainty about future rate hikes keeping people away," said Gennadiy Goldberg, interest rates strategist at TD Securities in New York.

A fall on Wall Street, led by a steep drop in oil prices and a dip in Apple shares, also stoked demand for safer US government debt, adding to gains in Treasuries in afternoon trading.

Benchmark 10-year US Treasury notes were last up 4/32 in price to yield 2.230 percent, down from 2.243 percent on Thursday.

The 30-year bond was last up 11/32 in price to yield 2.945 percent, down from 2.963 percent.

US two-year notes were near flat in price to yield 1.014 percent, up from 1.002 percent on Thursday.

Copyright Reuters, 2015