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Bonds Slide as Oil Ramps

The effect of rising oil prices on bonds may be muted, but it still triggers selling.

Treasuries fell for the second day in a row, reacting to the latest rise in oil prices and expectations of a flood of new corporate bonds in the coming weeks.

Also, the latest weekly retail sales reports showed none of the sluggishness that affected consumers in August. That raised doubts about whether economic growth will ultimately slow enough to keep the

Fed from raising interest rates further.

The benchmark 10-year Treasury note fell 10/32 to 100 4/32, lifting its yield 4.1 basis points to 5.730%. Shorter-maturity issues outperformed, their yields rising by smaller amounts.

The 30-year Treasury bond lost 20/32 to 107 21/32, hiking its yield 4.2 basis points to 5.771%. And at the

Chicago Board of Trade

, the December

Treasury futures contract shed 16/32 to 100 4/32.

With no major economic data on the calendar, and none slated till the

retail sales report and the

Producer and

Consumer Price Indices next week, bond traders evidently focused chiefly on energy prices.

Ahead of Sunday's meeting of


ministers in Vienna, the front-month crude oil contract on the

New York Mercantile Exchange

closed at a 10-year high.

Traditionally, rising oil prices have been negative for the bond market, because they threaten to lead to higher prices more generally, and inflation reduces the appeal of bonds.

More recently, economists including Fed Chairman

Alan Greenspan have been noting the inflation-


potential of higher oil prices. To the extent that higher energy prices leave consumers with less money to spend on everything else, the argument goes, they have the potential to slow economic growth and keep other prices from rising.

Greenspan, in Congressional

testimony on July 20, noted that "the past year's rise in the price of oil has amounted to an annual $75 billion levy by foreign producers on domestic consumers of imported oil, the equivalent of a tax of roughly 1% of disposable income. This burden is another likely source of the slowed growth in real consumption outlays in recent months, though one that may prove to be largely transitory."

Bond market reaction to oil's latest move was muted,

CEO Tony Crescenzi said, because "Greenspan set the tone in July by emphasizing the tax-hike effect of it rather than the inflationary aspect of it."

In Crescenzi's view, today's selloff had more to do with the retail sales reports (which treated retail stocks well, boosting the

S&P Retail Index

0.9%), with comments by Fed

Governor Edward Kelley, and with an A1 story in the

New York Times

on sharply rising health insurance premiums.

Kelley, in an interview with

Market News International

, said he still sees the economy as running a higher risk of too-high inflation than of too-slow growth, and that it would take "a material slowdown that lasted for some period of time" to change his mind.

A recent spate of weak economic reports has some economists thinking that the Fed, in its pronouncements after meetings of the

Federal Open Market Committee, might start describing those risks as balanced as soon as next month, indicating a lower likelihood of future rate increases.

Fed funds futures discounted somewhat higher odds of a rate hike by the end of the year today (about 25%) than yesterday.

Others gave oil more credit for the action in bonds. "I think the correlation between bond yields and oil prices is still positive,"

First Tennessee Capital Markets

chief economist Christopher Low said. "They are still considered inflationary, though maybe they are less negative than other types of inflation."

"There was a sense that we were going to see a lid on oil prices at some point, and clearly that's not happening," Low continued.

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Bond investors ignored rising oil prices "for quite a while this summer," he pointed out. "But that's becoming more difficult to do, especially in the absence of other data."

Meanwhile, the developing corporate bond calendar continues to be a focus for government bond traders. The corporate bond calendar is expected to be loaded with European telecom issues in particular this fall, but as yet it isn't clear how much of the $40 billion of expected telecom issuance will come in September.

Economic Indicators

The weekly retail sales reports detected a resurgence in consumer activity in the first week of September. The

BTM Weekly U.S. Retail Chain Store Sales Index


definition |

chart ) rose 0.2%, its first gain in four weeks. The

Redbook Retail Average


definition |

chart ) found September sales running 1.2% ahead of August after one week.

In other economic news, the second-quarter

productivity and unit labor costs


definition |

chart |


) was revised to look even better than it did first time around. Nonfarm productivity rose at a 5.7% rate (up from 5.4%), while unit labor costs tumbled 0.4% (down from 0.2%).

The weekly

Mortgage Applications Survey


definition |

chart |


) detected higher levels of both refinancing and new mortgage activity. The Refinancing Index rose to 404.5, a six-month high, from 395. The Purchase Index rose to 307.4 from 298.6.

Finally, the

Purchasing Managers Non-Manufacturing Index


definition |


) rose to 60 in August from 55.5 in July.

Currency and Commodities

The dollar rose against the yen and the euro. It lately was worth 105.85 yen, up from 105.83. The beleaguered euro was worth $0.8703, down from $0.8896. For more on currencies, see


Currencies column.

Crude oil for October delivery at the

New York Mercantile Exchange

rose to $34.85 a barrel from $33.83.


Bridge Commodity Research Bureau Index

fell to 229.65 from 229.75.

Gold for December delivery at the


fell to $277.90 an ounce from $279.70.