Shouldn't have happened on this engine since the OP states that he just
rebuilt the engine, which would mean new cylinders (most likely). The only
other possibility would be a defect in the gasket or gasket surface of the
heads. There's just no other way for water to get into the oil.

In my 15 years experience with Volvo MD series engines, the most likely
culprit will be the water pump seal.

Steve
s/v Good Intentions