Updated from 11:21 a.m. EST

Treasuries snapped back Friday after a super-soft reading on new-home sales raised hopes that a housing slowdown will restrain economic growth and prevent too many rate hikes from the Federal Reserve.

Now it's all about Fed chairman Ben Bernanke and Co. as the Federal Open Market Committee begins its two-day policy meeting Monday. Fed funds futures show that traders are pricing in 100% odds for a quarter-point hike next week, which would bring the benchmark overnight lending rate to 4.75%.

The market will scrutinize the meeting statement, which it hopes will give some clues as to whether the central bank is gearing up for a change of policy direction. The FOMC has raised rates by 25 basis points at each of its last 14 meetings. There are 88% odds priced in that the rate will hit 5% at the next meeting in May.

The benchmark 10-year note ended the session up 17/32 to yield 4.67%, while the 30-year bond jumped 30/32 to yield 4.69%. Bond prices and yields move in opposite directions.

The two-year edged higher 3/32 to yield 4.71%, and the five-year tacked on 10/32 to yield 4.66%. Falling bond yields signal that the Treasury market sees a light at the end of the tunnel in terms of the monetary tightening campaign that began in June 2004.

"The market thinks, and I think, that the hikes are almost over ... one or two more moves, what's the big deal?" says Jim Glassman, chief economist at J.P. Morgan.

The last FOMC policy statement says that the central bank "judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance."

Glassman says that if this type of phrase is missing from the next policy statement, then that would cement assumptions that the Fed is almost done.

"Then we'll be more contingent on the data. ... It will make the next move more of a debate," he says.

In economic news, the Commerce Department said Friday that February new home sales fell by 10.5% to a 1.08 million annualized rate, from 1.23 million in the previous month. Consensus estimates had called for the number to dip to 1.21 million.

This is the weakest pace since April 2003, with unsold inventory and average home price components both up as well.

The bond market has kept a close eye on housing because economists believe the Fed won't stop raising interest rates until housing growth slows enough to rein in economic growth. Moreover, rising bond yields directly affect the housing market, because the 30-year mortgage rate tracks the rise and fall of the 10-year yield.

While the Fed is watching the housing sector for weakness, Rick Klingman, chief Treasuries trader at ABN Amro, says central bankers are not concerned with the current level of softening we have seen.

"They are somewhat pleased," Klingman says. "We'll need to see continued weakness before they'll feel like housing is a reason to slow the tightening process. This is just one month's number."

But in addition to today's soft home-sales data, there has been "steady and building evidence that real estate prices are coming down," Glassman says. "Price is the real housing issue, not the pace of activity."

Earlier in the session, a mixed report on durable goods gave the market a slight lift, as an underlying indicator of business investment came in soft.

The Commerce Department said that February durable-goods orders rose a stronger-than-expected 2.6%, vs. estimates for a 1.3% gain; and that January's shocking 9.9% drop was upwardly revised to a milder 8.9% fall.

However, transportation orders provided the bulk of the lift, up 13%; that rise was driven by strong civilian aircraft demand.

Declines were posted in base components including machinery, metals and electrical equipment. Most importantly for bonds, non-defense capital goods orders excluding aircraft fell by 2.3%, vs. expectations for a 1.0% increase. This component is considered a proxy for business investment.

The Treasury announced yesterday that it will sell $22 billion in two-year notes Monday, and $14 billion in five-year notes on Wednesday.

At the last two-year note auction, held on Feb. 22, the notes were sold at 4.689%, the highest yields since January 2001.

The Federal Reserve reported that foreign holdings of Treasury and agency debt fell by $8 billion last week, with Treasuries accounting for a decrease of $10.5 billion and agency debt rising $2.5 billion. Holdings as of yesterday totaled $1.588 trillion with $1.124 trillion of Treasuries and $464.5 billion of agencies.

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