Treasurys fall as focus is on the Fed

NEW YORK (AP) - Treasurys were near the flat line Monday as anxious investors refrained from major moves as they wondered what action the Federal Reserve will take on interest rates on Tuesday.


There was little reaction to the New York Fed's weak Empire State survey for September, which showed a drop to 14.7 from 25.1. While the survey showed a slower pace of growth, all readings over zero indicate expansion. This report, like many other recent data releases, shows some economic deterioration, but the degree of decline is uncertain.


A summer spent monitoring the spread of weakness in the below prime mortgage market has left investors anxious about the condition of the overall economy. This in turn has led to heightened concerns about whether the Fed will drop rates at its Tuesday meeting.


Although many analysts have concluded an interest rate decline is a given, there is disagreement over whether the Fed is more likely to reduce rates by a quarter percentage point or a half percentage point.


In addition, Fed Chairman Ben Bernanke and a lineup of other Fed speakers last week all focused on the strengths of the economy and avoided promising a rate decrease.


And some economists have warned that cheaper money may not be the proper solution to problems in the mortgage and corporate credit markets. Some are even predicing lower rates will lead to an increase in inflation. The fixed-income abhors inflation because it eats into the value of assets.


The benchmark 10-year Treasury note was 3/32 lower at 102 8/32 with a yield of 4.46 percent, not far from its close at 4.48 percent on Friday.


The 2-year note was unchanged at 99-29/32 with a yield of 4.05 percent, matching its Friday closing level.


The 30-year long bond there off morning losses to trade up 4/32 at 104 16/32 with a yield of 4.71 percent, down from 4.81 percent at Friday's close.


Monday's price losses come in the context of a number of recent rallies driven by safe-haven worries linked to weakness in other markets.


"The Treasury market is trading a bit lower, but does it really market whether the market is up or down the day before what is likely the most anticipated Fed meeting of the year?", asked Kevin Giddis, managing director of fixed income at Morgan Keegan.


A new prediction by former Fed leader Alan Greenspan that the embattled housing market will deteriorate even further, with heavier losses for housing prices, contributed to uneasiness among investors.