UNITED STATES bonds ceded an early gain as a Federal Reserve report failed to encourage investors to buy the securities at the lowest yields in 20 months. Bonds slipped from their highs after the Fed said output last month dropped 0.2 per cent, twice as much as analysts expected. The benchmark 30-year Treasury bond erased a gain or $5.63 per $1,000 bond, and was little changed, leaving its yield at 6.30 per cent. Two-year note yields fell one basis point to 5.63 per cent. Yesterday's industrial output report 'was bullish, but it was expected to be bullish,' Michael McGlone, a bond futures trader at Aubrey Lanston & Co, said. US industrial output fell for the first time in five months in September as cool autumn weather reduced demand for utilities. Factory output rose. Overall output fell 0.2 per cent last month, the Federal Reserve reported. An increase in factory output of 0.2 per cent could not offset a 5.4 per cent drop in utility output. The numbers did little to change the outlook for slow growth and tame inflation. 'The manufacturing sector is far from smoking here, but it is making advances,' John Ryding, an economist at Bear Stearns & Co, said. He said the drop in output 'is not a sign of weakness, it's a sign of cooler weather.' While output fell more than expected - the consensus forecast was for a 0.1 per cent decline - the numbers were not weak enough to strengthen the case for another interest rate cut by the Fed at the next meeting of its policymakers on November 15. Analysts are divided on whether the Fed will cut rates again at that meeting, or at its next meeting on December 19. At meetings in August and September, Fed officials took no immediate action. A decline in the plant use rate to 83.8 per cent in September to 84.2 per cent in August leaves the door open to a rate cut should other data come in weak.