Bonds Ease on Fed Speculation

U.S. Treasuries eased on Monday, giving back some recent gains in the wake of their strongest weekly rally in more than two months.

A dismal U.S. jobs report on Friday played a key role in those gains, leading many investors to raise bets on the possibility that the Federal Reserve would cut interest rates by an aggressive half percentage point at its Jan. 29-30 meeting.

However, with many Fed officials due to speak this week, the bond market may appear over-extended if they give no hints that the central bank would contemplate such a move.

Short-dated Treasury yields are near their lowest in more than three years.

Fed Chairman Ben Bernanke's speech on Thursday could be the biggest event of the week. On Monday, the market will hear from Federal Reserve Bank of Atlanta President Dennis Lockhart, who speaks at about 12:40 p.m.

"With a relatively modest data calendar this week, we expect the Fed-speak will be given particularly heavy weight -- especially given the debate over the magnitude of any Fed move later this month," said David Ader, head of government bond strategy at RBS Greenwich Capital, in Greenwich, Connecticut.

"Today we hear from the Fed's Lockhart on the outlook for the U.S. economy. He is a non-voting member this year and has recently sounded more hawkish, so we will interpret his comments in this context."

In early New York trade, benchmark 10-year notes <US10YT=RR> were down 3/32 in price, yielding 3.89 percent. Two-year notes <US2YT=RR>, which are particularly sensitive to changing views on the Fed's interest-rate policy, were down 2/32, yielding 2.77 percent.

On Friday, two-year yields fell near 2.65 percent, their lowest since late 2004. Federal Reserve's Vice Chairman Donald Kohn acknowledged on Saturday that the central bank's message had been clouded by a difference of opinions being voiced by policy-makers, but warned markets to learn to live with it.