US Treasury prices were mixed on Monday, with shorter-term maturities lower after a Federal Reserve official outlined a scenario that could force the central bank to raise interest rates more quickly. Trading was thin as the holiday season and end-of-year blues started in earnest, exaggerating intraday price swings. Richmond Fed President Jeffrey Lacker, giving his first economic speech since taking office in August, said faster rate increases could be necessary if productivity slows, which would tend to push up production costs.
"Recent data suggest that a slowdown in productivity growth may already be in train," said Lacker, who will not be a voting member of the Federal Open Market Committee in 2005.
"The comments sound on the hawkish side to us and pressured the short end of the market," said one trader at a US primary dealer.
That helped drag Eurodollar futures, which already suggest three Fed rate hikes in the first half of 2005, to session lows. June Eurodollars reached their lowest point since late July before bouncing to a slightly higher close.
The 10-year Treasury note rose 4/32 for a yield of 4.18 percent, down from 4.20 percent. Ten-year yields look likely to trade between 4.17 percent and 4.25 percent in the next few days.
Monday's thin trading was highlighted by curve-flattening on ideas that restrained inflation will hold down yields on longer-dated Treasuries while the Fed pushes up short-term rates in measured bites well into 2005.
The two-year/10-year yield spread narrowed to 115 basis points from 119 bps on Friday.
High heating and gasoline bills are already cutting into discretionary income for lower- and middle-income Americans, dealers said. Research firm ShopperTrak said Saturday's US retail sales fell 7 percent from a year ago. The Saturday before Christmas is a key day in the holiday shopping season.
The 30-year bond rose 8/32, yielding 4.81 percent, down from 4.83 percent. Five-year notes were steady at a yield of 3.57 percent. Two-year notes were down 2/32 at a yield of 3.03 percent.
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