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Agitated About Fed, Thinly Traded Treasury Market Loses Some Ground

Either likely outcome of tomorrow's Federal Open Market Committee meeting could trigger more selling.

When in doubt, sell.

For no particular reason, the bond market -- which nothing short of a miracle will keep from having its worst year since 1994 -- is moderately weaker this morning. With no economic data on the docket, analysts are blaming the

Fed, whose monetary policy committee holds its final meeting of the year tomorrow.

The benchmark 30-year Treasury bond was lately off 5/32 at 96 17/32, lifting its yield a basis point to 6.38%. The long bond's highest closing yield of the year is 6.39%, reached on Thursday.

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While expected to leave the

fed funds rate unchanged at 5.5%, the

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Federal Open Market Committee is feared likely to give some indication that rate hikes are probable next year, unless economic growth slows, quickly.

The FOMC meeting is "putting a concern into the market,"

Thomson Global Markets

managing analyst Ken Logan said.

"It's hard to see how the outcome of this meeting is going to have a positive effect on the markets,"

Goldman Sachs

senior money market economist John Youngdahl said. An indication that rate hikes are probably forthcoming isn't likely to cheer bond investors, but nor, necessarily, would be silence from the FOMC on that point, which "could be taken to mean that the Fed is being too patient, too cautious," he said.

Today's move comes on the light volume that is typical of year-end in the bond market. That means it's a larger move than would have occurred if there were a normal number of people participating. "The main theme remains illiquidity," Youngdahl said. "So therefore moderate-sized activities can have disproportionate effects on pricing."

At this time of year, Logan added, "the market loses a lot of its players, a lot of its liquidity, and a lot of the traditional rhyme or reason for what's behind the price action. A lot of distortions and anomalies enter in."