Bonds mixed ahead of Fed meeting
U.S. Treasurys are mixed as investors await the Fed meeting on Wednesday; inflation may now be primary concern.
NEW YORK (CNNMoney.com) -- Government bond prices were mixed on Monday as investors look toward the Federal Reserve meeting on Wednesday.
The benchmark 10-year note fell 1/32 to 97 19/32, and its yield was 4.17%, unchanged from Friday. The 30-year long bond rose 7/32 to 94 22/32, and its yield declined to 4.70% from 4.72%.
The 2-year note dropped 3/32 to 99 12/32 and the yield increased to 2.95% from 2.89% on Friday. Bond prices and yields move in opposite directions.
Earlier in the day, Treasury yields extended a decline that started on Friday. "We are seeing a correction, as opposed to any headlines that are pushing prices up today," said Nick Bennenbroek, economist at Wells Fargo (WFC, Fortune 500), of the morning trading. The 10-year note yield peaked at 4.27% in mid-June.
Bond yields have been aggressively climbing in recent weeks because "the Federal Reserve as a group led the market to believe that the Fed would raise rates," said Michael Cheah, senior portfolio manager at AIG SunAmerica.
If the Fed raises interest rates, it suggests that the central bank is no longer as worried about a slowing economy as it is about inflation. Typically, investors flock to bonds when there is a lot of economic uncertainty. However, when the sentiment shifts toward a rate-raising environment, investors tend to to also shift assets.
Bond traders are also readying for two major auctions this week. On Tuesday, the government will auction $30 billion of 2-year notes and on Thursday, the government will auction $20 billion of 5-year notes.
"Traders are cheapening up the bond prices in anticipation of the auction," said Steve Van Order, chief fixed income strategist at Calvert Asset Management. As traders push prices down, they also push bond yields up "to try to entice investors to participate in the auctions," he said.
Investors are awaiting news from the Federal Reserve, which is holding a two-day meeting this week. The central bank will make an announcement on June 25 about what it plans to do with interest rates. The Fed has cut rates seven times since September, raising concerns about inflation.
"The Federal Reserve meeting on Wednesday is definitely a focus and has something to do with the movement" of bond prices today, said Bennenbroek, "but there is enough uncertainty, that it is hard to identify what the impact would be on the rates today."
There is growing speculation that the central bank will hold rates steady this time around, but in the meantime, "the bond market is confused because the Fed is confused," said Cheah. He explained that it appears the Fed is on the fence about whether inflation has become a problem or whether the economic slowdown will persist. 
