Focus in the bond market turns to start of Fed's last policy meeting of 2009 By Deborah Levine, MarketWatch NEW YORK (MarketWatch) -- Treasury prices headed lower on Tuesday, pushing yields on 10-year notes back to the highest since August, after a government report showed producer prices rose more than forecast and raised concerns that inflation may be creeping back up in the U.S. economy. Still, bond traders' main focus will be on what the Federal Reserve says following its two-day meeting that ends Wednesday. Concerns were raised by a media report saying the central bank may opt to increase its discount rate, which sets borrowing costs directly to banks, as a small-scale, first step away from the ultra-loose monetary policy in place since the credit crisis began. Yields on 10-year notes (UST10Y 3.54, -0.01, -0.23%) rose 6 basis points to 3.61%. A basis point is 0.01%. Bond prices move inversely to their yields. Two-year note yields (UST2YR 0.82, +0.02, +3.00%) also rose, up 2 basis points to 0.88%. Higher energy costs pushed the U.S. producer price index to a 1.8% increase for November, the Labor Department reported. Economists surveyed by MarketWatch had predicted a rise of 1.0%. Core producer prices, excluding volatile food and energy, rose an above-forecast 0.5% -- the largest increase since October 2008. See more on producer prices. "The Fed is unlikely to harbor significant inflation concerns given the degree of slack in labor and product markets, but there is scant evidence of deflation pressures and, given the move up in gold and commodities and the drop in the dollar in recent months, we remain concerned about the longer-run outlook for inflation," said economists at RDQ Economics, in a note. Separately, the Federal Reserve Bank of New York's manufacturing survey showed conditions for New York manufacturers deteriorated in December, following four months of improvement, according to Dow Jones Newswires. Its general business conditions index fell by about 21 points, down to 2.55 from 23.51 in November -- a much larger drop than some economists expected. Investors also had data on industrial production to digest. "We're skewing things a bit bearishly to accommodate what we anticipate will be stronger data in the offing," said strategists at CRT Capital Group. "But with yields close to their recent highs, a small push carries the risk of breaking into a new range and so carries more importance." Also, at 1 p.m. Eastern time, a report on homebuilders' sentiment is predicted to show confidence in the sector improved slightly.

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