Continued optimism over inflation and comparative calm in Argentina after recent weeks of turmoil were helping flatten the yield curve fractionally on Monday in relatively quiet U.S. Treasury market trading. The 30-year bond rose as investors moved back into riskier and more inflation-sensitive, long-term instruments. Meanwhile, the two-year note gave back some of its recent Argentina-inspired gains.

Highly regarded as one of the best crystal balls for the performance of the economy, the yield curve describes the spread between yields on two-year notes and 30-year bonds. A steepening yield curve usually indicates greater economic strength -- as well as inflation -- down the road. Today's flattening was mild, however, and didn't indicate any significant change in the bond market's view of the economy.

Bond investors were also keeping an eye on the stock market; weakness there gave some lift to prices on the long end of the Treasury market. Bonds are generally seen as a safe haven compared to more volatile holdings like stocks, and equities and bonds often move in opposite directions.

The two-year Treasury note was lately falling 1/32 to 99 27/32, yielding 3.954%. The benchmark 10-year note rose 2/32 to 99 4/32, yielding 5.116%. The 30-year Treasury bond rose 9/32 to 97 24/32, yielding 5.529%. Yields and prices move in opposite directions.

"The yield curve is flattening because of the better inflation news we've seen lately, and also because of Argentina," said Glenn Capelo, bond trader at Salomon Smith Barney. "The two-year notes were too expensive -- the Argentine situation has stabilized quite a bit. Some of that premium is being taken back."

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Inflation concerns have been building lately after six interest rate cuts by the

Federal Reserve this year. But Fed Chairman Alan Greenspan allayed some of those concerns last week. In his semiannual speech before Congress, the Greenspan said inflation was not a great concern and suggested that more interest rate cuts were in the bag. Inflation tends to erode the value of fixed-income assets, because the value of the cash return is worth less at maturity.

In the meantime, approval of a highly unpopular budget-cuts package by the lower house of Argentina's Congress over the weekend calmed fears of a debt default there. Talk that Argentina might default on $130 billion in debt obligations has escalated in recent weeks, and some worry that a default could spark flight from high-risk instruments in other emerging and developing markets. The Argentine Senate must still approve the package, and even then, Argentina could still default.

Bond investors are looking ahead to the question-and-answer period following Greenspan's repeat testimony on Tuesday before the Senate Banking Committee - he spoke before the House last week -- as well as the second-quarter

employment cost index Thursday and

gross domestic product data Friday.