Friday: Bonds Woozy After Fed Official's Fretful Words

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By Andrew Morse and Justin Lahart
Staff Reporters

Just when you thought it was safe to go back in the bond market¿

With the 30-year bond auction, the

piece de resistance

of the

Treasury's

quarterly refunding, over and done with, bond traders probably thought the worst was out of the way. They were wrong.

Raising the specter of inflation (you might remember the concept from an economics course),

Kansas City Federal Reserve

President Thomas Hoenig cautioned there weren't enough Americans to fill all the jobs the miracle economy was creating. "We are finding the

local jobs market tight, both at the entry level and especially for high-tech areas, and it's very similar, I think, to much of the rest of the country," Hoenig told a gathering in Jefferson City, Mo., according to

Reuters

. That, of course, set "half-empty" bond traders into an inflation-hunt panic.

"We're really melting down here," said Patrick Dimick, the Treasuries analyst at

UBS Securities

, as Hoenig's comments scrolled across the

Reuters

and

Bloomberg

screens. "I gotta hop."

Bonds, up after the auction result, immediately slid into the losing column.

"You try not to get too concerned about that stuff," says Bill Kirby, who co-heads government trading at

Prudential Securities

, reminding anyone who would listen that Hoenig is a nonvoting member of the Fed.

Maybe, but it's not like Hoenig is also mute. He can still try to muster up support. After all, his district reported wages might be rising -- a sure sign of impending inflation -- in Wednesday's

Beige Book

survey of regional economies.

"Labor markets remained tight in much of the District, and some companies responded by increasing wages for entry-level workers and certain skilled positions," the entry for Hoenig's 10th district read. The tone was almost shrill, given that central bankers wrote the text.

Friday, another Federal Reserve president, San Francisco's Robert Parry, speaks to the

Northwest Taxable Bond Club

. I want to party with those guys!

Friday's numbers

(times EDT):

Treasury announcement

(2:30 p.m.): The Treasury never sleeps. A day after it finished its $38 billion quarterly refunding, it's out hawking more wares, this time 52-week bills. Expect no change at $13 billion.

San Francisco Federal Reserve President Robert Parry speech

(3:30 p.m.): The Federal Reserve official speaks to the

Northwest Taxable Bond Club

in Bellevue, Wash.