Updated from 10:32 a.m. EST

Treasuries held on to gains Monday ahead of an evening speech by Federal Reserve Chairman Ben Bernanke, which is likely to beat out Tuesday's wholesale price report for market attention.

The morning advance extended last week's rally, the biggest 10-year gain since December, which was posted on speculation that the fed funds rate could top out at 5% as the market continued to bet on a more dovish central bank policy.

Interest rate futures show traders are pricing in near certain odds for a hike next week, but the chance that the fed funds rate will hit 5% at the next meeting in May have dropped to 73% from 90% last week.

This week's Treasury auctions of two- and five-year notes could keep gains on the short end in check, as traders make room for the new paper.

The benchmark 10-year note ended the session up 5/32 of a point to yield 4.65%, while the 30-year bond was up 12/32 to yield 4.70%. Bond prices and yields move in opposite directions.

The two-year note was unchanged to yield 4.64%, and the five-year edged higher 2/32 to yield 4.60%.

Bernanke's appearance at the Economic Club of New York tonight is one of three speeches to be delivered by Fed officials before next week's Federal Open Market Committee meeting, when the central bank is widely expected to raise the fed funds rate to 4.75% from 4.50%.

"The market has got it into its head that the Fed is going to stop hiking in the near future," says Drew Matus, senior U.S. economist at Lehman Brothers. "People also have it in their head that Ben Bernanke will support that viewpoint. I think we're setting up for a potentially disruptive evening if Bernanke doesn't sound as dovish as the market expects. There's a pretty good chance he won't."

In his testimony to Congress last month, Bernanke said that the economy is expanding at a pace that may require further rate hikes to keep inflation in check, emphasizing that future monetary policy decisions will be based on economic data.

"People want to be in if he doesn't say something hawkish, particularly after last Thursdays' very tame CPI numbers," says Richard Gilhooly, interest rate strategist at BNP Paribas, who also notes the market has been helped by traders covering bearish bets on the Treasury market. "If inflation doesn't show up in upcoming numbers , then the question is, should the Fed continue to raise the nominal funds rate against forecasts for inflation that has yet to transpire?"

Gilhooly also points out that the market could be responding to forces that are largely expected to weigh on the economy at some point, even if they have yet to manifest themselves; these include a slowing housing market and the lagging effect of the Fed's rate-hike campaign.

The central bank has lifted rates by a quarter point 14 times since June 2004, bringing the target rate for overnight loans between banks to 4.5% from 1%.

Although it may be overshadowed by Bernanke's comments, the PPI report is nonetheless a key measure of inflation. Wall Street expected core wholesale prices, which exclude food and energy costs, to rise by a small 0.1%, leaving annual growth unchanged at 1.5%.

In other economic news, the February leading indicators index dipped by a less-than-expected 0.2%, vs. expectations for a 0.3% drop, while the January gain was cut in half to a 0.5% rise.

The report was mixed and did little to move the Treasury market, with the 10 components showing five gainers and five decliners.

Other Fed Voices

Midday Monday, Boston Fed President Cathy Minehan addressed the Massachusetts Association of Realtors in Boston, and San Francisco Fed President Janet Yellen spoke at the Community Reinvestment Conference in Las Vegas. Yellen is a voting member of the policy-setting FOMC.

Minehan's remarks were largely in line with Fedspeak from the past, saying that her short- and medium-term outlook for the economy is "quite positive" and that "overall, the economy in 2006 seems likely to be very well-behaved."

But in her talk with area realtors, she said that declining housing market activity could have a greater impact than once assumed at the Fed.

The Fed has assumed that flattening home prices and dipping construction could lead to a modest dent in growth, with the central bank estimating 3.5% economic growth this year.

"Clearly, however, we could be wrong on the magnitudes," Minehan said. "Real estate prices could actually decline."

She also said that the nation's large twin deficits pose a serious risk to the economy, and that both deficits are unsustainable at current levels. "I am concerned that we are living beyond our means," she said.

Readings on existing- and new-home sales will be released in the back half of the week. Wall Street expects existing homes sales to have dipped to an annual rate of 6.5 million in February, from 6.56 million in the previous month. Purchases of previously owned homes account for about 85% of the market.

New-home sales are expected to come in at a 1.21 million annual pace in February, down from 1.23 million in the previous month.

Yellen's talk on community development didn't touch on Fed policy issues and was largely ignored by market watchers. Last week, however, she touched off the dovish Fed frenzy by saying that she would be "looking for signs of the delayed effects on output and inflation of our past policy actions and will be sensitive to the possibility that policy could overshoot."

She also said that despite limited slack in the jobs market and evidence that the economy is strong, "it's hard to find evidence suggesting upward inflationary pressures."

Several upcoming corporate sales were announced for this week, including Mellon ( MEL), which will sell $250 million in 10-year notes; CIT Group ( CIT), which will sell $200 million in 30-years; Prudential Financial ( PRU), which will sell $500 million in 10- and 30-year notes; and Sierra Pacific ( SRP), which will sell $350 million in 10-years.

Elsewhere, Home Depot ( HD) will issue $4 billion in five- and 10-year notes, and Wachovia Bank ( WB) will sell $3.5 billion in debt.

Separately, Federal Reserve Board member Rich Spillenkothen will retire on June 30 after 30 years of service, the central bank said Monday. He is the director of the Division of Banking Supervision and Regulation, serves on the Basel Committee on Banking Supervision and is the chairman of the Association of Supervisors of Banks of the Americas.

"Rich has led the Board's supervision program during periods of unparalleled growth, innovation, deregulation, and consolidation in the American banking system, as well as through a number of financial system and banking shocks," Bernanke said in a statement. "During Rich's tenure, the Federal Reserve's approach to banking supervision has evolved significantly. His leadership in the supervision of risk management and capital adequacy form a sound basis for the future work of financial supervisors everywhere."

If you liked this article you might like

Funds for a Dollar Dip

Funds for a Dollar Dip

New ETF Tackles the Carry Trade

New ETF Tackles the Carry Trade

Yahoo! Spooks Tech Sector

Yahoo! Spooks Tech Sector

Long Island Wine: Old World Meets New

Long Island Wine: Old World Meets New

Wall Street Hemmed In

Wall Street Hemmed In