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Bond prices fall ahead of 2-day Fed meeting

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U.S. Treasury prices were lower on Monday after data showing sales of new U.S. single-family homes fell more than expected in December.

The 7.0 percent decline in home sales along with a continued sell-off in emerging market assets spurred safe-haven bids for Treasuries. Benchmark yields remained at near the two-month lows hit on Friday.

"The market is already skittish," said Wilmer Stith, portfolio manager at Wilmington Trust in Baltimore. "The fact that we got these weaker-than expected housing numbers just plays into that hand of more volatility."

(Read more: What the Fed will mean for markets this week)

The U.S. Commerce Department said sales fell to a seasonally adjusted annual rate of 414,000 units. November's sales were revised to a 445,000-unit pace from the previously reported 464,000-unit rate.

Economists polled by Reuters had expected new-home sales, which are measured when contracts are signed, to slow to a 457,000-unit pace in December.

The rout in emerging market assets that began last week continued on Monday, adding to demand for bonds. Emerging markets have been roiled by worries about U.S. Federal Reserve policy, slowing growth in China and political problems in Turkey, Argentina and Ukraine.

The benchmark emerging stock index hit a 4-1/2-month trough on Monday, falling 1.7 percent. The index was on track for the biggest one-day fall since August.

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"The flare-up in emerging markets that we saw last week is still fresh on the minds of investors," said Gabriel Mann, U.S. rates strategist at RBS Securities in Stamford, Connecticut.

Treasury prices pared losses but remained slightly down on nervousness a day ahead of the Fed's two-day policy-setting meeting. The Fed will consider whether to further scale back its bond-purchase program, which is aimed at holding down long-term borrowing costs to help the economy.

Benchmark 10-year Treasury notes were 9/32 lower in price with a yield of 2.755 percent, up from an earlier yield of 2.71 percent.

In December, the Fed reduced its monthly purchases of Treasurys and mortgage-backed securities by $10 billion to $75 billion. Some analysts expect the Fed will cut its monthly purchases by another $10 billion this week. The Fed will issue its policy statement at the close of its meeting on Wednesday afternoon.

"There are always nerves around the Fed meetings," said Mann, adding that the mood could have spurred earlier selling of Treasurys.

On Wall Street, two of the three major stock indexes stumbled, with the benchmark Standard & Poor's 500 index falling 0.32 percent.

—By Reuters