Bonds tread water

NEW YORK (CNNMoney.com) -- With no economic news on the agenda, trading in the Treasuries market was light Friday, with any slight movement roughly mirroring the reverse of the stock market.

Treasuries often trade in the opposite direction of stocks because they're backed by the government and as a result, considered a low-risk alternative. As major indexes ended the session mixed Friday, Treasuries remained in a tight range.

What yields are doing: Prices fell and yields rose. Yields for the benchmark 10-year note edged higher to 2.56% from 2.55% Thursday. The 2-year note's yield held steady at 0.36% and the 5-year note's yield inched up to 1.16%. The yield on the 30-year bond was up slightly at 3.94%.

The bigger picture: Overall, bond traders continue to have quantitative easing on the back of their minds. The move -- commonly referred to as QE2 -- would mark the second round of large-scale asset purchases of U.S. Treasuries by the Fed, as part of its effort to get the economy moving.

For the last three weeks, expectations about quantitative easing have been the main driver behind surging demand for U.S. debt.

Mainstream forecasts expect the government to announce a purchase program of between $500 billion and $1 trillion in Treasuries in November, which would, in theory, drive bond prices higher and yields down.

But investors have been trying to front-run that trade, getting in at current prices and yields.

This week, bonds traded in a tighter range, as analysts now question to what extent QE2 has been baked into financial markets.

"Quantitative easing remains a largely unknown force because this time the market thinks it's priced in," Jim Vogel, head of agency debt research at FTN Financial said in a note to investors. "Our advice: keep thinking and observing rather than blindly following market see-saws such as 'buy rumor, sell fact.'"

He thinks Treasuries will continue to trade in a tight range, with housing data out early next week not leading to any major market moves. Traders are also easing off the pedal ahead of mid-term elections in less than two weeks.

Amid fears about so-called currency wars, they'll be closely watching announcements from foreign countries about monetary policy. U.S. officials are pushing for emerging economies like China to allow their currencies to rise against the dollar, helping U.S. companies better compete in the export market.

But if emerging countries come back swinging, their defensive policies could drive the dollar higher and weaken demand for Treasurys from foreign central banks, said Michael Cheah, bond fund manager for SunAmerica.

"We cannot assume they're going to take this lying down," Cheah said. "We'll pay attention to countries on the other side of a weak dollar. If other central banks step up in their defense in so-called currency war, it changes the equation."