Longer-dated US Treasury prices climbed on Monday, pushing yields on the 30-year bond to 1-1/2-year lows after the latest US economic figures offered a subdued reading of inflation. In contrast, short-term yields hovered near 2-1/2-year highs, pressured by the near certainty that the Federal Reserve will boost interest rates by a quarter-percentage point after a two-day policy meeting that begins on Tuesday. In afternoon trade, the benchmark 10-year note added 3/32 in price for a yield of 4.13 percent. Two-year notes were down 1/32 for a yield of 3.28 percent, up from 3.26 percent.
The disparity drove a further flattening of the yield curve, with the spread between two- and ten-year notes shrinking to 87, its lowest since April 2001.
"With the Fed expected to go another 25 basis points on Wednesday and still tame inflation reports, we are just seeing more of the same flattening trend," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle, Washington.
The day's economic data painted a mixed picture as Midwest manufacturers fared better than expected in January, according to figures from purchasing managers, but new home sales proved surprisingly weak in December, neutralising the market reaction.
Another report on personal income and consumption showed inflation was well-contained, lessening the chances that the Federal Reserve would be forced to hike interest rates more aggressively.
The Fed meets on Tuesday and Wednesday to set monetary policy and is widely expected to raise its benchmark federal funds rate a quarter-percentage point to 2.50 percent. Interest rate futures have also priced in hikes at the FOMC's next two meetings.
Yields on five-year notes inched up to 3.70 percent from 3.69 percent. The 30-year bond climbed 11/32, adding to a hefty jump on Friday and pushing its yield to 4.59 percent - its lowest since April 2003.
That move was due in part to the core personal consumption expenditures index, a measure of prices favoured by the Fed. The PCE was unchanged in December, taking the annual rate of growth to 1.5 percent from a revised 1.6 percent in November.
Bond prices initially dipped after the Chicago purchasing management index rose to 62.4 in January from 61.9 in December. Analysts had looked for a fall to 60.0.
The employment index also ticked up to 52.8 after it dropped to a revised 51.1 in December, though the prices paid index declined.