Treasury prices mixed as rate hike seems uncertain

NEW YORK - Treasury bond prices were mixed Thursday after reports showed that the economy lost jobs for the sixth straight month and that the services sector contracted in June.

Reports from the Labor Department and the Institute for Supply Management indicated that the economy remains fragile. And, that led traders to speculate that the Federal Reserve might not be able to raise interest rates to fight inflation.

Normally, a trend toward lower or even stable rates would send the bond market higher, because rates and prices move in opposite directions. But higher rates are expected to chill the ongoing rally in commodities, especially energy prices, that have raised concerns about inflation. A barrel of oil neared $146 a barrel for the first time Thursday in trading on the New York Mercantile Exchange.

With a weak economy, it's harder for the Fed to use its rate policy to try to control price increases. And that was making bond traders, whose holdings are eroded by inflation, nervous Thursday.

"The Federal Reserve is in a corner, they can't hike rates yet there is inflation," said T.J. Marta, fixed-income analyst at RBC Capital Markets. "The market had been expecting a rate hike this year, but I think that is going to be removed going forward. The market really started to get too hawkish."

He said the market's belief that the Fed is less likely to raise rates made short-term debt like the 2-year note more attractive; these securities are the most sensitive to rate changes. That sent prices of longer-term government debt lower, as they are the most vulnerable to the effects of inflation.

In an abbreviated session because of the Fourth of July holiday, the 10-year note fell 7/32 to 99 5/32. Its yield rose to 3.98 percent from 3.96 percent late Wednesday, according to BGCantor Market Data. Yields usually move in the opposite direction from prices.

The 30-year long bond fell 17/32 to 97 12/32. Its yield rose to 4.54 percent from 4.50 percent late Wednesday.

The 2-year note rose 2/32 to 100 21/32, and yielded 2.54 percent, down from 2.58 percent late Wednesday. The debt is the most sensitive to interest rate moves.

The 3-month Treasury bill's yield rose to 1.83 percent from 1.70 percent late Wednesday, and the discount rate rose to 1.81 percent from 1.67 percent.

The Labor Department reported that employers cut payrolls by 62,000 in June, which was largely on target with the 60,000 expected by economists. The government also reported that the jobless rate held steady at 5.5 percent last month.

The Institute for Supply Management's report that its index of the service sector fell to 48.2 from 51.7 in May touched off renewed misgivings about the well-being of the economy. Wall Street had expected the number would come in at 51; a reading below 50 signals contraction.

Meanwhile, the European Central Bank's concerns about rising prices in the 15 nations that use the euro prompted the quarter-point increase in the key rate to 4.25 percent. The dollar showed little reaction to the widely expected decision.

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