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Bonds Surge in Wake of Senator's Countrywide Warning

U.S. Treasuries surged Monday, with benchmark yields reaching their lowest in more than two years as more credit market strains made investors abandon equities for the relative safety of bonds.

Benchmark 10-year notes were trading 1-3/32 higher in price for a yield of 3.87 percent from 4.01 percent late Friday. Yield on the 10-year note, which moves inversely to prices, was its lowest since June 2005.

Observers see the yield drop as a reaction to a leader from Sen. Charles "Chuck" Schumer (D.-N.Y.) to the leadership of the Federal Home Loan Bank (FHLB) system.

In the letter, Schumer, who sits on the Senate Finance Committee and the Committee on Banking, Housing, and Urban Affairs, urged the FHLB's head to stop extending cash advances to "predatory" lender Countrywide Financial.

“Countrywide is treating the Federal Home Loan Bank system like its personal ATM,” Schumer said in the letter.

“When Congress created these banks, it never intended for them to be used to prop up mortgage lenders that specialized in deceiving borrowers. At a time when Countrywide’s mortgage portfolio is deteriorating drastically, FHLB’s exposure to Countrywide poses an unreasonable risk.”

Continuing the stream of bad news from banks, analysts at Goldman Sachs said HSBC, Europe's biggest bank, was likely to need a further $12 billion in provisions for its U.S. subprime mortgage and home equity loans.

The Federal Reserve, meanwhile, said it would supply additional liquidity to the banking system ahead of the end of the year in response to heightened pressures in money markets.

"We have been following the equity markets and as stocks go lower, bonds go higher," said Ted Ake, head of bond trading at Mizuho Securities in New York, adding "the Fed is doing everything it can to alleviate any kind of funding issues for the year but there is still a flight-to-quality."

CNBC.com contributed to this story.

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