U.S. government debt prices were mostly weaker in light trading Monday as investors stayed on the sidelines before the Federal Reserve's policy meeting and Treasury Department note sales later this week.
Wall Street widely expects the Fed to leave the key federal funds target rate at 2.00 percent after its two-day meeting, though many economists predict the Fed will add tougher anti-inflation language in its policy statement.
"The Fed should stay pat, but the key will be the statement," said Andrew Brenner, senior vice president at MF Global in New York.
Monday's bond losses were pronounced in the two-year and five-year areas, as traders made room for an auction of $30 billion of two-year notes Tuesday and a $20 billion sale of five-year debt Thursday, analysts said.
"The two-year sector has become a hot potato especially in front of Tuesday's supply," said George Goncalves, chief Treasury, TIPS and agency strategist with Morgan Stanley in New York.
Meanwhile, longer-dated bonds had limited support from safe-haven buying on continued worries about the outlook for financial services companies, which announced more write-downs and suffered more downgrades last week.
Benchmark 10-year Treasury notes ended 2/32 lower in price at 97-20/32, below their session high of 98.
Their yield, which moves inversely to the price, was 4.18 percent, up from 4.17 percent late Friday.
Two-year notes, which are most sensitive to the market's outlook on Fed policy, were down 4/32 in price for a 2.96 percent yield, up from 2.90 percent late Friday.
The spread between yields on two-year notes and 10-year notes narrowed, taking the Treasury curve to its flattest in a week.
Trading volume was about half of its monthly average, as investors mulled the outcome of the Fed's policy meeting on Wednesday.
Traders' speculations on the Fed's next rate move has vacillated wildly in recent weeks. More than two week ago, they were betting the Fed would aggressively raise rates in the second half of the year to fight inflation.
Last week, they pared those expectations following several reports showing anemic economic growth, but they still anticipate at least two quarter-percentage-point increases by year-end, according to interest rate futures.
Besides the Treasury supply and Fed meeting, traders are bracing for fresh data on inflation and housing throughout week, analysts said.
Five-year Treasury notes fell 7/32 for a yield of 3.65 percent, up from 3.59 percent late Friday, while the 30-year bonds rose 8/32 for a yield of 4.71 percent, down from 4.73 percent late Friday.