US Treasuries were narrowly mixed on Monday as a lack of market-moving economic data left investors toying with the yield curve again. Federal Reserve Chairman Alan Greenspan is due to address Congress this week and his testimony is expected to set the tone for gauging future moves in official interest rates. As traders waited for the Fed chief, they were left to fiddle with one of the few profitable alternatives in a rangebound market - curve-flattening trades, or bets on the outperformance of longer-dated debt.
Greenspan's morsels of direction on monetary policy could include references to inflation, or hints as to whether the central bank might drop the word "measured" - referring to the pace of rate hikes - from its policy statement.
Bill Hornbarger, chief fixed-income strategist at A.G. Edwards & Sons, said the omission of the word would be a signal that the Fed would like more flexibility to be more or less aggressive as it sees fit. "They've backed themselves into a bit of a corner here," said Hornbarger, likening the US central bank's task to "managing a soft landing for financial markets."
In the meantime, the same old curve flattener was in full effect. Benchmark 10-year notes climbed 4/32 for a yield of 4.08 percent, down from 4.09 percent late Friday.
Two-year notes, in contrast, were off 2/32 and yielding 3.36 percent, up from 3.33 percent Friday. The discrepancy narrowed the spread between those two maturities back to 72 basis points, near 3-1/2-year lows touched last week.
Dealers continue to expect a flatter yield curve, given subdued inflationary pressures and rising short-term official rates.
Greenspan testifies on the US economy to a Senate committee on Wednesday and a House panel on Thursday. The mandated appearances in the past have triggered big moves in bond prices.
"There is some concern that we could see a much more hawkish stance from the Fed and that Greenspan may spell out a little more tightening than the markets had priced after the January employment number," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, North Carolina.
Still, views of the Fed chief's likely tone were not uniform. A Merrill Lynch report suggested Greenspan would sound more dovish to avoid giving the impression the Fed would toss in a half percentage point tightening at any of its upcoming meetings.
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