Expectations of another inflation-fighting rate hike Tuesday by the Fed calmed bondholders on Monday since inflation eats up the value of fixed interest payments collected on bond investments.

The 10-year Treasury note closed 1/4 higher, or up by US$2.50 per each $1,000 in securities at face value, to 100 1/32.

The gain in price lowered its yield, a benchmark for corporate and mortgage borrowing rates, to 4.23% vs. 4.27% Friday.

Most fixed-income investors sees the Tuesday meeting resulting in a quarter-point rise in the central bank’s target rate, for the 11th time since June 2004, taking it to 3.75%.

However, not all economists expect the Fed to raise rates, in light of the economic devastation caused by Hurricane Katrina.

Bond market gains were broad Monday.

The 30-year bond added 3/8 to 112 7/16, yielding 4.55% vs. 4.57%. The 5-year note was up 3/16 at 99 11/32, yielding 4.02% vs. 4.08%.

The 2-year note was up 3/32 at 100 4/32, yielding 3.93% vs. 3.99%.

Yields on the 10-year note hit 4.28% late last week, the highest post-Katrina, taken there not only on the threat of a flood of U.S. government debt, but because two regional manufacturing indexes offered a whiff of higher inflation within their respective price components. The 10-year yield fell to 3.9% immediately after the storm, as investors sought out lower-risk investments.