LONDON - Lebanon dollar bonds rallied by around 2 cents on Monday after rebels in neighbouring Syria toppled President Bashar al-Assad, fuelled by expectations the events could weaken Lebanese armed group Hezbollah and bring change to the country.

Lebanon's 2029 bond gained the most, up 2.03 cents to bid at 12.76 cents on the dollar, its highest level since late 2021, Tradeweb data showed. 

The price remains deeply distressed, but the bonds have rallied at several points since Israel began bombing Lebanon and agreed a ceasefire with Hezbollah, with investors attributing the gains to hopes that if the group is weakened, it could break a political deadlock in the defaulted nation and enable progress towards sustainable fiscal policies.

In Syria, rebels seized the capital Damascus in a lightning advance and Assad fled to Russia, ending 13 years of civil war and more than 50 years of his family's brutal rule.

Analysts said the latest events meant Iran had lost a key component of its arc of influence in the region, as well as its overland link with Hezbollah in Lebanon.

"This undermines Hezbollah further, which, in the near term, means lower security risk for Israel and a potentially more market-friendly government in Lebanon," said Hasnain Malik at Tellimer.

Hezbollah has played a big part in the power struggle in Lebanon, which has had no head of state or fully empowered cabinet since ex-President Michel Aoun's term ended in October 2022, deepening institutional paralysis in a country where one of the world's worst economic crises has been festering for years.

The latest events might force a weakened Hezbollah to play a more constructive role in much needed political normalisation, said Tim Ash, senior sovereign strategist at RBC BlueBay Asset Management.

"New international focus on a wider Levant reconstruction effort will surely drag Lebanon along with Syrian coattails - assuming some stability and political reform in Syria itself," Ash said in emailed comments.

Israel's international bonds also strengthened a touch, up as much as 0.4 cents before trimming those gains. The 2043 bond was being bid at 85.40 cents in the dollar, Tradeweb data showed.  

The cost of insuring exposure to the country's bonds eased to 106 basis points, data from S&P Global Market Intelligence showed. That is the lowest level since Oct. 11, 2023, in the immediate aftermath of Hamas' Oct. 7 attack from Gaza. 

(Reporting by Karin Strohecker, editing by Libby George, Ros Russell and Hugh Lawson)