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Bonds Drop on Home Sales Report

Fears of an imminent rate hike continue to plague the market.

The bond market is running scared this morning, suffering under the weight of more strong economic news and continued fear of a


interest-rate hike. The 30-year bond closed in on 6% briefly before recovering from its lows, and the two-year note has reached its highest level since June 9, 1998.

Treasuries, having already endured a poor overnight session, fell further when the

Commerce Department

reported a 9.2% jump in sales of new homes at 10 a.m. EDT. The bond, which at one point was down 22/32, was off 7/32 to 90 11/32. The yield rose to 5.946%. The two-year note lost 1/32 to yield 5.535%.

"Just like with yesterday's


number and some of the other numbers we've been seeing, it's almost a pickup in momentum in the economy," said Ken Logan, managing analyst at

Thomson Global Markets

. (The National Association of Purchasing Management's index of manufacturing sentiment rose to 55.2 yesterday.) "It's like it's getting a new head of steam under it."

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It looks that way in the housing sector. In April, the seasonally adjusted annual rate of sales rose to 978,000, the second highest rate ever. Sales of new homes had tailed off after reaching the record of 1.02 million sales in November. Though this release is more an indication of the power of the consumer rather than rising inflation, in bearish times like this, the market doesn't care.

"This market feels that we are potentially one data release away from a Fed tightening," Logan said.

That one release may be the May

employment report

, to be released Friday. Economists are projecting a 216,000 increase in new nonfarm payrolls and a 0.3% increase in average hourly earnings, according to


. However, analysts say the market's only hope that the Fed won't hike rates is for the payroll increase to be very low, coupled with no increase in average hourly earnings. Otherwise, the market is preparing for higher short-term interest rates. "Then the new question becomes, is it the only move?" Logan said.

Today's release exacerbated the Treasury market's earlier weakness. The major overseas bond markets -- Japan, Germany and England -- all fell overnight, and that hurt the Treasury market heading into this morning's open. The yield on the 10-year benchmark Japanese bond rose 7 basis points to 1.675% on fears that the government would freeze its national consumption tax, which would worsen the country's fiscal balance.

Fed Chairman

Alan Greenspan

speaks in Boston today. The Fed's next meeting is scheduled for June 29 and 30.