Updated from 1:05 p.m. EST

Treasuries were mixed Wednesday, ending with the yield on the 10-year note above that of the two-year for the first time since January. Recent selling on the long end of the curve has pushed rates to their highest levels since 2004 and unwound what is known as an "inverted" yield curve, which happens when yields on the short end rise higher than those on the long end.

The benchmark 10-year ended the day down 2/32 of a point to yield 4.73%, while the two-year gained 2/32 to yield 4.72%.

The 30-year bond was down 8/32 to yield 4.73% and the five-year was little changed to yield 4.75%. Bond prices and yields move in opposite directions.

A yield curve inversion can imply that investors see more risk in the near term, and the event has preceded the nation's last two recessions. ( Click here for a full yield curve explanation.)

"The market has been narrowing the inversion due to several factors," says Peter Cardillo, chief market analyst at SW Bach & Co., citing the long-awaited rate decision due out Thursday from the Bank of Japan, hawkish comments from several Federal Reserve members and strong economic data that point to higher inflation.

"What was valid just a month ago, when people thought the economy was headed for a slowdown or negative growth, has been reversed," says Cardillo.

The market is still pricing in at least two more quarter-point rate hikes by the end of May, which would bring the overnight lending rate to 5%. Lehman Brothers, one of the 22 primary Treasury auction participants, said that the rate could hit 5.5% by August or September.

Comments this week from St. Louis Fed President William Poole reaffirmed inflation fears. Poole said the central bank will "have to step a little harder on the brake" if upcoming data exceed expectations, and that it's safer to err on the side of being more restrictive than to risk inflation.

He also seemed relatively unconcerned Wednesday about the housing outlook slowing economic growth, saying that the sector will stabilize and remain strong. Poole also said that a slowdown in sales and home prices will not significantly affect consumer spending.

In housing sector news, the weekly Mortgage Bankers Association mortgage applications index rose 0.7% last week, with purchasing applications down 0.4%.

The 30-year mortgage rate edged higher to 6.31%, while the 15-year rose 13 basis points to 5.97%.

But analysts at ABN Amro said that the widely expected housing market slowdown will be a drag on real economic growth.

"Real growth is expected to gradually decelerate, in large part due to a projected cooling in the housing market," wrote chief U.S. economist Steven Ricchiuto. "Specifically, we anticipate real GDP will lose about 1.7% of its upside momentum as the year progresses."

The Bank of Japan will announce overnight whether it has decided to raise its overnight lending rate from its current level at 0%.

Selling hit fixed-income markets worldwide on signs that the European Central Bank and the BOJ will begin to raise its historically low interest rates and tighten its money supplies.

Tony Crescenzi, chief bond market strategist at Miller Tabak and a RealMoney.com contributor, says that if interest rates worldwide rise, Treasuries could become less attractive to foreign investors. The reason is that as rates go higher around the world, the Treasury market may no longer be the only safe haven where foreign investors can get a real return.

The Treasury said it will auction $8 billion in 10-year notes on Thursday, in a reopening of last month's sale. This could weigh on the market as traders sell older notes to make room for the new issue.

This is less than the $9 billion in 10-years that Wall Street had been expecting. To make room for all this new debt, the Treasury will redeem retirement fund assets and suspend new investments in civil service funds to avoid hitting its credit limit. ( Read this to see what happens when the U.S. maxes out its credit.)

"Market moves will likely be dictated by flows, though we do not expect any big moves," fixed-income analysts with Barclays wrote in a research note. "With payrolls on Friday, we believe rates will remain relatively range-bound as investors take some risk off the table and wait for that number."

Wall Street expects that 210,000 jobs were added in February, up from 193,000 in January, which would be consistent with a tightening labor market and more Fed hikes.

The weekly jobless claims figure due out Thursday will be closely watched as an indicator of employment strength ahead of the monthly payrolls report. Fed policymakers have been eyeing the employment picture because they believe the U.S. is close to full employment, the lowest level of unemployment possible before wage inflation sets in. Bond traders loathe inflation because it erodes the value of fixed-income investments.

But the Federal Reserve's own Survey of Consumer Finances shoots some holes into the theory that a stronger labor force could result in more spending and inflationary pressures. From 1998 to 2001, before-tax median family income -- expressed in 2004 dollars -- increased from $38,800 to $42,500, a nearly 10% gain, the survey found. Over the next three years, it rose only to $43,200, a 1.6% gain.

The report also found that the mean income level declined to $70,700 in 2004 from $72,400 in 2001, down 3.6%. The mean level rose from $61,700 in 1998 to $72,400 in 2001.

In more Fedspeak, Treasuries were little changed Wednesday after new Federal Reserve Chairman Ben Bernanke said nothing about the economy or interest rates. Speaking at the Independent Community Bankers of America National Convention in Las Vegas, Bernanke focused on the health of the banking sector.

Bernanke was generally upbeat on the banking sector, saying "overall performance of community banks in recent years has been quite strong."

However, he also voiced concerns about lending risks, saying that community banks should improve the way they manage risks. The Fed chairman said that to stay competitive, they have relied more on commercial real estate lending and that there has been "some easing" in standards for those loans. He also said that interest rate exposure is a risk for local banks.

Bernanke's comment on interest rates might be interpreted by some as a warning signal about the possibility of higher interest rates, Crescenzi says in a RealMoney.com blog entry posted after Bernanke's comments.

"In discussing lending risks, Bernanke repeats an ongoing concern at the Fed with respect to lax lending standards," Crescenzi writes. "His comments show that views expressed under Greenspan have likely been institutionalized."

And echoing Fed speeches past, Chicago Fed President Michael Moskow said Tuesday evening at the University of Chicago Graduate School of Business that inflation pressures require "careful monitoring" as the expansion approaches the limits of "resource utilization," referring to the tightening labor market.

"With the unemployment rate currently at 4.7% and capacity utilization near its long-run average, it is important to ask how much slack remains in the economy,'' Moskow said. But he did not make any firm comments as to how high the fed funds rate should go.

In addition to Bernanke's meeting with Federal Reserve bankers in Las Vegas, St. Louis President William Poole, Fed Governor Donald Kohn, New York President Timothy Geithner and Chicago President Michael Moskow will have all delivered speeches by the end of the week.

The Fed chairman, fed governors and the New York Fed president are voting members of the policy-setting Federal Open Market Committee. Poole and Moskow don't vote this year.

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