'Run Up And Down'

"There is a lot of thought going into trying to figure out what the Fed is going to do," said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm. "The differing views minute to minute are causing Treasuries to run up and down, with most people preferring to sit on their hands until the news is handed down."

Bernanke said at conference Oct. 15 the economy may need more stimulus because inflation is too low and unemployment too high at 9.6%. Core prices, which exclude food and fuel, were little changed in September, capping a 0.8% increase in the past 12 months, the smallest year-over-year gain since 1961. The Fed next meets Nov. 2-3.

New York Fed Bank President William Dudley repeated his view today that the central bank will probably need to stage a second round of unconventional stimulus to combat too-low inflation and too-high unemployment. Dudley, vice chairman of the Federal Open Market Committee, spoke in Ithaca, N.Y.

Sustained Price Declines

While central banks are typically more concerned about faster inflation, the worst financial crisis since the Great Depression has made sustained price declines a bigger concern. Fed policy makers, who already cut interest rates almost to zero and bought $1.7 trillion of securities, are discussing more purchases of Treasuries to flood markets with cheap money to prevent stagnating prices from undermining the recovery.

"With more quantitative easing the likelihood of a deflation scare over the short term has decreased significantly, as the Fed is committed to upping inflation expectations," said Keith Blackwell, an interest-rate strategist at Royal Bank of Canada in New York, a primary dealer. "TIPS look much more attractive."

At yesterday's auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.84, versus 3.15 at the April offering and an average of 2.38 at the past 10. Indirect bidders, a class of investors that includes foreign central banks, purchased 39.4% of the notes today. At the April sale, they bought 23.1%, the lowest in the history of the securities.

Note Auctions

The last five-year TIPS auction, on April 26, drew a yield of 0.55%, which was then the lowest on record.

The U.S. will auction $35 billion in two-year notes today, $35 billion of five-year securities tomorrow and $29 billion in seven-year debt on Oct. 28.

The dollar dropped to a 15-year low versus the yen after a pledge by the Group of 20 nations Oct. 23 to avoid "competitive devaluation" failed to dispel speculation the Fed will debase the greenback by announcing more bond purchases in a strategy called quantitative easing.