Updated from 11:51 a.m. ESTTreasuries slid Monday in quiet trading as the Federal Reserve kicked off a two-day policy meeting and a two-year note auction came off reasonably well. In corporate bonds, Diageo ( DEO) will sell $1 billion in notes, up from an originally planned $750 million, in two parts. There will be $400 million in three-year floaters and $600 million in seven-year fixed-rate notes. The benchmark 10-year note ended the day down 8/32 to yield 4.70%, while the 30-year bond fell 19/32 to yield 4.73%. Bond prices and yields move in opposite directions. The two-year note was off 1/32 to yield 4.73%, and the five-year dipped 4/32 to yield 4.69%. Futures markets are currently pricing in 100% odds that Ben Bernanke's first meeting will end Tuesday afternoon with the official fed funds target rising a quarter-point to 4.75%. The Fed's 15th consecutive hike would follow a mixed bag of economic data last week, including a strong number on existing-home sales but a weaker one on new homes. But it's the accompanying policy statement that markets care about, and Fed watchers will scour the language for clues as to how many more times the central bank will raise rates. "The Fed meets and hikes this week and too many words have been spilled speculating on the language change," writes David Ader, bond strategist at RBS Greenwich Capital, who believes the market is "ahead of itself in getting into pause mode. There are simply not enough signs of a slowdown, slack is less, and core inflation is closer to the top of the tolerance band." This Federal Open Market Committee meeting will be the first that Ben Bernanke will preside over since succeeding Alan Greenspan in February. And although the policy-setting Federal Open Market Committee now features a mostly new cast of characters, some believe it will look and sound much like the old Alan Greenspan-led Fed.
"The feeling is if you're expecting a change, you're going to be disappointed," says Hugh Johnson, chairman of Johnson Illington Advisors. Johnson notes that Bernanke's testimony before Congress was very Greenspan-like in tone, and that the Fed head has said that there will not be a noticeable change in the way monetary policy is conducted. He believes that any change in the statement wording will be subtle, and will say that Fed policy will be less forward looking and more reactive to incoming numbers. In the meantime, there's little economic data to drive trading this week, with the final GDP numbers due out Thursday and the personal income numbers on the docket for Friday. The Treasury auctioned $22 billion in new two-year notes this afternoon, yielding 4.730% with a relatively light bid-to-cover ratio of 2.12 compared with the 12-month average at 2.23. But indirect bidders pulled in 35.8% of the offer, which is slightly above the 12-month average. Two-year note yields are among the most sensitive to changes in monetary policy, and they have climbed since the Fed started raising rates in June 2004.