NEW YORK—Treasury prices closed mixed Monday after investors turned wary ahead of the Federal Reserve's meeting on interest rates this week.
Treasurys had rallied sharply in recent weeks on the market's perception that the Fed was likely to order another half percentage rate cut following a similar reduction in September that surprised and pleased investors. But that view was in doubt Monday.
"The market may have gotten a little too optimistic," said Tom di Galoma, head of Treasurys trading at Jefferies & Co.
Traders think the Fed needs to cut rates to bolster an economy damaged by a slowing housing market and weakness in the credit markets, he said.
But the market now thinks the Fed this time will opt to move gradually. So it is positioning itself for a reduction of a quarter percentage point Wednesday afternoon, at the conclusion of the two-day meeting, he said.
The benchmark 10-year Treasury note rose 5/32 to 102 29/32 with a yield of 4.38 percent, down from 4.41 percent at Friday's close.
The 30-year long bond rose 15/32 to 105 11/32 with a yield of 4.66 percent, down from 4.69 percent late Friday.
The 2-year note fell 1/32 to 99 21/32 with a yield of 3.80 percent, up from 3.77 percent on Friday.
The yield on the 3-month note rose to 3.99 percent from 3.96 percent on Friday as the discount note advanced to 3.89 percent from 3.84 percent.
Sales of the shorter term 2-year note combined with purchasing of longer-term issues is a trading strategy known as a "curve flattener." The Treasury market's yield curve measures the distance between the premiums on short- and long-term loans. A flatter yield curve can be seen when the distance between the various yields narrows.
A flat yield curve is a market signal that there is uncertainty about the condition of the economy and investors don't know whether to reward short- or long-term loans.
Investors Monday also tried to reconcile the cautiousness of recent speeches by Fed Chairman Ben Bernanke and his central bank colleagues with traders' strong certainty that a rate cut is in the works.
The Fed has said its policy decisions will be linked to economic data. But recent reports have pointed to strong consumer and manufacturing sectors, despite the weakness in other spheres.
Fed officials in recent speeches have stressed that policy decisions at this time are very challenging.
Stock prices were higher Monday, further diminishing demand for low-risk Treasurys, which tend to fall from favor when investors pour money into equities.