The Treasury market ended slightly higher Thursday, thanks largely to a midsession

coupon pass by the

Fed. In the first half of the session, bond prices eroded as stocks used the April

retail sales report as an excuse to rally.

At first glance, the retail sales report was friendlier than expected. Sales rose less than expected, which is positive in the context of an economy that is growing too rapidly for the Fed's comfort.

But while the stock market went off to the races, bond mavens took the news in stride, concluding that it is unlikely to affect the outcome of next Tuesday's

Federal Open Market Committee meeting. The FOMC is expected to hike the

fed funds rate from 6% to 6.5%. That would be its sixth rate hike since June, and its first 50-basis-point hike (all the others have been 25 basis points) since February 1995.

Fed funds futures contracts actually discounted a slightly higher likelihood of a 50-basis-point rate hike next Tuesday in Thursday's action.

The fact that the March retail sales numbers were revised higher supported that conclusion, said Michael Pianin, a Treasuries trader at

Fuji Securities

. "If you build in the revisions on retail sales, it was consensus," he said. "These numbers are not going to stop the Fed from doing what it's going to do."

Treasury prices went down in the first half of the session, Pianin said, in part because stocks were rallying and partly in sympathy with the European bond markets, which were under pressure.

A late-day recovery wouldn't be surprising, Pianin said, because Friday's big economic news, the April

Producer Price Index, is expected to be pretty. After rising a full percentage point in both February and March as oil prices surged, the PPI is forecast to drop by 0.2% in April, reflecting the retreat by oil prices last month. The core PPI is seen rising a trend-like 0.1%.

In any case, the market got a boost from the Fed's midday coupon pass, which targeted most bonds due between August 2023 and February 2029, and which ultimately took $527 million out of the market. "We went up solely and completely because of the coupon pass," said Gib Clark, manager of government bond trading at

Zions National Bank

.

Meanwhile, commodity prices continued their troubling romp of the last several days. Oil hit its highest level in two months and a key commodity price index ratcheted to nearly a two-year high.

Against the backdrop of a hiking Fed and rising commodity prices, the other bond markets -- federal agency securities in particular -- are providing "a truer picture of what's going on in interest rates" than are Treasuries, which continue to benefit from shrinking supply, Clark noted. Agency and other bonds that, unlike Treasuries, entail credit risk remain very out of favor with investors.

A benchmark agency issue, the

Fannie Mae

(FNM)

five-year note, traded at a yield 85 basis points over the comparable Treasuries Thursday -- an all-time high, noted John Atkins, market analyst at

IDEAglobal.com

. An "unacknowledged buyers' strike" is afflicting all of the spread markets, "despite the fact that we're in a definite supply trough," Atkins said. "Fed policy really seems to be holding buyers in check."

The benchmark 10-year Treasury note ended up 1/32 at 100 18/32, trimming its yield 1.8 basis points to 6.420%. The five-year note was unchanged and the two-year note fell in price, lifting its yield 3.1 basis points to 6.835%. The 30-year bond gained 5/32 to 101 15/32, shaving its yield 1.1 basis points to 6.143%.

At the

Chicago Board of Trade

, the June

Treasury futures contract gained 6/32 to 94 8/32.

Economic Indicators

Retail sales fell 0.2% in April, the first decline since August 1998 and the largest decline since July 1998. Economists polled by

Reuters

had forecast a 0.4% increase.

Excluding automobile sales, which fell 0.7% in their second consecutive decline, retail sales were unchanged for the month.

The ex-auto sales total was held down by a 2.3% decline in gas station sales as gasoline prices fell. In March, rising gas prices helped boost gas station sales by 4.3%.

The year-on-year pace of retail sales growth slipped to 7.6% in April from 11.6% in March.

At the same time, the March gain in retail sales was revised to 0.5% from 0.2%, and the ex-autos gain was revised to 1.2% from 0.9%.

For more on the retail sales report, see the

story by

TheStreet.com/NYTimes.com

joint newsroom.

In other economic news, the weekly count of

initial jobless claims fell slightly to 297,000 from 304,000, as the four-week average rose to 285,250, its highest level since the third week of January.

Meanwhile,

import prices fell 1.6% in April, dragged down by a 12.6% decline in petroleum import prices. Excluding petroleum, import prices rose 0.1%.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 108.48 yen, down from 109.55. The euro was worth $0.9016, down from $0.9065. For more on currencies, please take a look at

TSC's

Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

rose to $29.11 a barrel, a two-month high, from $28.10.

The

Bridge Commodity Research Bureau Index

rose to 220.57, nearly a two-year high, from 218.93.

Gold for June delivery at the

Comex

fell to $276.50 an ounce from $278.70.