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<B>Bond Brief:</B> Pre-Fed Dip

Treasury prices fall ahead of the FOMC amid more evidence the consumer isn't dead yet.

Updated from 10:20 a.m. EST

Treasuries fell Monday on a report that showed consumer spending is still going strong, as traders awaited Tuesday's widely anticipated interest rate hike, as well as a manufacturing report, employment data and the Treasury's refunding announcement later in the week.

In corporate issuance,

Washington Mutual

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sold $1 billion in debt; while


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said it plans to sell $600 million in notes.

The benchmark 10-year note lost 5/32 of a point to yield 4.53%, up from 4.51% late Friday. The note has lost ground over the last week as the market began to price in risk ahead of factors including Alan Greenspan's last FOMC meeting, President George W. Bush's State of the Union address and geopolitical instability. The yield moved 4.50% for the first time since mid-December last week.

The 30-year bond lost 6/32 of a point to yield 4.70%, up from 4.69% the previous session. Bond prices and yields move in opposite directions.

In shorter-dated debt, the five-year lost 2/32 of a point to yield 4.46%, while the two-year edged lower 1/32 to yield 4.51%. The three-month bill, which is most sensitive to changes in the fed funds rate, was yielding 4.45%.

Even though the closely tracked core personal consumption expenditure index rose only 0.1% in December, missing forecasts for a 0.2% gain, the rest of the Commerce Department report beat expectations.

Consumer spending shot up a surprisingly strong 0.9% vs. expectations for a 0.7% rise; and the figure for November was upwardly revised. The release was the latest data point suggesting reports of the consumers' demise are exaggerated, as detailed

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The department also said personal income rose 0.4% for the second straight month, after the November figure was upwardly revised. Still, the personal savings rate -- the percent of after-tax income consumers sock away -- was a negative 0.7%, the lowest saving rate since August.

The consumer spending report did little to soothe inflation fears a day ahead of Alan Greenspan's final FOMC meeting. The Commerce Department had said Friday that core inflation rose at a 2.2% annual rate in the fourth quarter, a bit above the Fed's perceived 1% to 2% inflation comfort zone.

"We've seen over the past couple of days expectations rise for the peak interest rate. Now people think it will be 4.75% to 4.80% by the end of March," says John Shin, senior economist with Lehman Brothers. "Before, people thought the highest the rate would be by the end of the month would be between 4.60% and 4.65%."

Tuesday's widely anticipated rate hike, which would be the 14th consecutive quarter-point increase and bring the overnight lending rate to 4.50%, is considered the last predictable move from the Fed as Ben Bernanke gets ready to take over as chairman.

"If you look at the fed funds futures, I think the market is pricing in Greenspan would do, but that it really has no inkling as to what Bernanke will do," says Frank Bifulco, private investor and former fixed-income strategist at Deutsche Bank.

"They'll probably moderate the key phrase a little, but I think we're going to trade on the numbers going forward until we get more statements from Bernanke," he adds.

The consumer spending report kicks off a week of announcements that David Ader, interest rate strategist at RBS Greenwich Capital, says are likely to weigh on Treasuries.

Economic reports on tap include readings on consumer confidence, manufacturing, auto sales and payroll reports for January. The statement released with the FOMC's rate decision will also be scrutinized for clues as to the possibility of a rate hike in March.

The Treasury said Monday that its net borrowing estimates for the January through June period now totals $188 billion, well above the prior record high set at $146 billion.

Since the start of the quarter the Treasury has only raised $27 billion worth of new cash.

As for the quarterly refunding auctions, which includes the reintroduction of the 30-year bond, Barclay's Capital expects the refunding of 30-year, 10-year and three-year notes to total $46 billion. Like RBS, the firm is one of 22 primary U.S. government securities dealers that are required to participate in Treasury auctions.

Treasury demand will be closely watched, as U.S. securities posted their biggest price declines since October last week on weak foreign demand.

Ramped up demand for Treasuries from overseas investors and pension funds have kept long-term yields historically low, and the market has been sensitive to any evidence that those buyers are diversifying away from the Treasury market.