Updated from 11:42 a.m. EST

Longer-dated Treasuries tracked higher Wednesday, and the yield curve remained inverted as traders awaited the upcoming housing data and next week's Federal Reserve policy meeting.

"The market is higher, but we're not talking huge moves here," says Michael Darda, chief economist at MKM Partners. "The market is looking at a plateau in the fed funds rate at or around 5%."

Fed funds futures show the market has priced in 100% odds that the Fed will raise rates by 25 basis points to 4.75% on March 28. Odds for a hike to 5% at the next meeting in May rose to 88% from 73% at the end of last week.

The benchmark 10-year note ended the day up 4/32 to yield 4.70%, and the 30-year bond added 11/32 to yield 4.72%. Bond prices and yields move in opposite directions.

The two-year note was little changed to yield 4.74%, while the five-year note was flat to yield 4.69%.

While he managed to stay on topic, Fed chief Ben Bernanke's recent speech on the yield curve managed to flummox the market as much as his predecessor's gnomic remarks once did. In reaction, Wall Street has largely set it aside to focus on the upcoming Federal Open Market Committee meeting.

"In the absence of surprisingly weak data, and housing will be key, next week's FOMC announcement is our next major inflection point," says Jonathon Lewis, principal at Samson Capital Advisors.

The two-day meeting, scheduled for March 27-28, will feature several fresh faces, including newly minted Fed chairman Ben Bernanke and two new Fed governors, Kevin Warsh and Randall Kroszner. Fed Vice Chairman Roger Ferguson, who's stepping down in late April, won't attend the meeting.

Homes Again

Readings on existing-home sales will be released Thursday, and new-home sales data will hit the market Friday. Wall Street expects existing sales to have dipped to an annual rate of 6.5 million in February, from 6.56 million 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.

A housing slowdown is practically a foregone conclusion for market watchers, but economists are debating just how soft the sector will become. The important question is whether it will mean a severe cutback in consumer spending, which accounts for about two-thirds of U.S. economic activity.

The Mortgage Bankers Association said its mortgage applications index dipped by 1.6% last week. Purchasing applications fell by 2.3%, and refinancings slipped 0.6%. The fixed 30-year mortgage rate added 11 basis points to 6.31%.

The Fed has raised interest rates at 14 consecutive meetings since June 2004, but that's done little to significantly boost the yield on the 10-year note. For the housing sector, this is important because the 30-year mortgage rate moves with the 10-year yield.

Bernanke on Their Minds

Bernanke said in remarks to the Economic Club of New York that low yields on the long end of the curve reflect lowered inflation expectations, while shorter-term notes are still sensitive to fed funds moves.

Longer-dated maturities, such as the 10-year note and the 30-year bond, typically yield more than shorter-dated notes because it's riskier to loan money for longer periods of time. Moreover, inflation erodes the value of the dollar over time and thus the value of a Treasury note or bond. Higher yields help compensate for that erosion.

"If you look further out, the market thinks the Fed starts cutting rates later in the year," says MKM's Darda. "And that's where the market is wrong. If one really believes that inflation is not a problem, it's much wiser to buy the financial sector at 12 times earnings, vs. bonds, which are trading at a 22 multiple."

Supply also may be capping gains on the short end, with the Treasury set to announce Thursday the size of its upcoming two- and five-year note auctions. The auctions are scheduled for next week.

On the corporate side, Lehman Brothers ( LEH) will sell $750 million in debt Wednesday, and Sierra Pacific ( SRP) will sell $350 million in debt Wednesday and Thursday.

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