Treasuries Move Higher as Fed Speculation Continues to Build

By Yi Ping Ho ,

U.S. Treasuries firmed Friday, but trading was quiet and volume was light as investors rested ahead of next week's

Federal Open Market Committee meeting.

The two-year note, which tends to react most to changes in Fed monetary policy, recently ticked up 1/32 to 100 18/32, lowering the yield, which moves in the opposite direction of the price, to 3.943%. On the more inflation-sensitive end of the market, the 10-year Treasury note rose 6/32 to 98 27/32, yielding 5.513%, while the 30-year Treasury bond climbed 10/32 to 96 23/32, moving the yield down to 5.602%.

"U.S. inflation has already peaked and is now heading lower," Bruce Steinberg, the chief economist at

Merrill Lynch

, wrote in a research report today. Meanwhile, market observers said short-term Treasuries received a leg up from the selloff in the equities, as an earnings warning from drugmaker

Merck

(MRK) - Get Report

put a drag on the

Dow Jones Industrial Average.

The market is evenly split between those who believe

Alan Greenspan and the other FOMC members will cut rates by 25 basis points, and those who expect a 50 basis-point reduction. The Fed has cut interest rates by 250 basis points since Jan. 3. The slew of economic data since the Fed's last meeting on May 15 has been mixed, indicating ongoing weakness in key sectors like manufacturing, but also hints of recovery and ongoing strength in consumer spending.

"My personal opinion is they don't have to go 50," said Don Galante, head trader at

Fuji Securities

, who noted that two major brokerage firms recently raised their expectation to a half-point cut instead of a quarter-point move. "At that point, the Fed is being extremely stimulative. People are a little extreme in their forecast right now."

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