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Bonds rise as policy stays accommodative

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U.S. Treasurys prices rose on Monday before this week's supply of new debt, aided by accommodative monetary policy and dovish remarks by some Federal Reserve officials.

"Japanese markets were closed for a holiday so activity was thin overnight, allowing prices to dip a little bit, led by the belly of the curve as players positioned for this week's Treasury supply. But flows improved when U.S. participants came in to work and the market firmed," said John Canavan, fixed income analyst at Stone & McCarthy Research Associates.

The market also drew support from remarks by Fed Bank of New York President William Dudley. Dudley said the Fed still needs to push hard against threats to the U.S. economic recovery, and that fiscal uncertainties in particular "loom very large right now."

Benchmark 10-year notes rose 4/32 in price, their yields easing to 2.720 percent from 2.73 percent late on Friday. Thirty-year bonds rose 12/32. Their yields eased to 3.742 percent from 3.76 percent late on Friday.

Treasurys prices rose and yields fell last week after the Federal Reserve decided to put off unwinding any of its ample monetary accommodation until it had more confidence in the sustainability of the still-subdued economic recovery.

The Fed decided not to trim its large-scale asset purchases, citing strains in the economy from tight fiscal policy and higher mortgage rates as reasons for its decision. Fewer asset purchases would put downward pressure on bond prices and upward pressure on yields.

Dudley said any changes to the Fed's bond-buying program - aimed at stimulating economic activity and cutting unemployment - must be based on the most recent measures of economic health.

Dudley highlighted the drags from the sharp recent rise in longer-term interest rates, higher taxes and lower public spending adopted earlier this year, and questions over the U.S. debt limit and government funding as Congress meets this autumn.

(Read more: Fed's Dudley: Two key tapering tests not yet met)

Fed Bank of Atlanta President Dennis Lockhart, also speaking Monday, said monthly average payroll growth slowed in the last three months and that monetary policy could foster appropriately favorable interest rates in the context of low inflation.

On Monday, Dallas Fed President Richard Fisher said the White House has "terribly mishandled" the process of picking the next chair of the Federal Reserve, allowing the U.S. central bank to be politicized and potential nominees to be denigrated in the process.

Picking a Fed chair "should not be a public debate," he told the Texas Association of Independent Bankers. Nine other events with Fed officials are on tap this week.

"A parade of public appearances by Fed officials and the $97 billion package of Treasury two-year, five-year, and seven-year note auctions dominate the market calendar this week," said Thomas Simons, money market economist at Jefferies & Co.

The Treasury will sell two-year notes on Tuesday, five-year notes on Wednesday, and seven-year notes on Thursday.

The Federal Reserve Bank of New York is scheduled to purchase between $3 billion and $4 billion in notes due 2019 and 2020 on Monday as part of its ongoing $85 billion a month in purchases of Treasurys and mortgage-backed securities.

—By Reuters.

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