US Treasury debt prices slipped on Friday after a key consumer sentiment report was not as weak as some dealers had suspected, triggering some profit-taking after Thursday's brisk rally.
With benchmark yields already at five-month lows, data needs to be especially weak to generate more buying interest.
"A cessation of the strong buying which allowed the market to enter such rarefied air was more the cause of the decline than any overt selling," said Ken Logan, managing analyst at IFR Markets.
The 10-year Treasury note fell 9/32 for a yield of 4.11 percent, up from 4.07 percent late Thursday and an early-Friday low of 4.05 percent.
Market players see the next resistance levels at 4.135 percent and then 4.20 percent; the 4.00 percent yield is expected to be tough to break on the downside.
In Friday's sole major report, the University of Michigan's index of consumer sentiment slipped to 95.8 in September from 95.9. The median forecast had been for an increase to 96.5 but dealers had leaned toward a softer number.
The index has been essentially unchanged for four months and has been between 90 and 97 points for 10 of the past 11.
"This relative stability has been remarkable given the ebbs and flows in job creation, the equity markets, the conflict in Iraq, the election campaign, interest rates and gasoline prices," said Steven Wood, economist at Insight Economics.
All eyes are now on Tuesday's Federal Open Market Committee monetary policy-setting meeting. Any shift in the Fed's post-meeting commentary from recent instalments could set the tone for fixed-income markets for several weeks, dealers said.
"The statement following the meeting will be carefully
scrutinised for any sign of future plans," said Richard Gilhooly, fixed-income market strategist at BNP Paribas.
Dealers are keen to see if the Fed refers to high energy prices in its statement, as it did in August.
Crude oil futures prices ended at a three-week high on Friday on worries about a succession of storms that could damage Gulf of Mexico production facilities.
The 30-year bond was down 12/32, yielding 4.91 percent, up from 4.88 percent.
Long bond yields are approaching major resistance half-way between 2003 lows and 2004 highs.
Five-year notes were down 7/32 to yield 3.33 percent vs. 3.27 percent, and two-year notes were down 3/32 at a yield of 2.48 percent.
Market expectations still call for the Fed to raise interest rates by a quarter percentage point at its meeting on Tuesday, although there has been growing speculation that the central bank may go slower on rate increase
from there.
"Expect the FOMC to promise a continuation of its 'measured pace,' which should set us up for one more 25 basis points increase before the end of the year," said Carl Tannenbaum, chief economist with LaSalle Bank.
Also on Friday, the Economic Cycle Research Institute's weekly index slipped to 131.7 from 132.5.
The index's annualised growth rate was steady at -0.2 percent.
"The continued weakness in a number of components of the index suggests that it's more than just high oil prices that are ailing the economy," said Lakshman Achuthan, managing director of ECRI.