Treasuries ended with only modest gains after an early rout in oil prices turned into a more modest selloff. Treasuries reached their highs for the day as oil hit its lows, and retreated as oil recovered, reflecting the extent to which inflation expectations are tied to oil prices.

Still, Treasuries' price gains dropped yields to their lowest levels in more than two weeks.

With no major economic indicators to react to and none slated before Friday, when the June

employment report will be released, the benchmark 10-year Treasury note gained 3/32 to 103 24/32, dropping its yield 1.4 basis points to 5.977%, the lowest since June 16.

Other Treasury issues scored even more impressive gains. The two- and five-year note yields and the 30-year bond yield dropped to their lowest levels since mid-April. The two-year note rose 2/32 to 100 5/32, dropping its yield 2.5 basis points to 6.285%, while the 30-year bond gained 7/32 to 105 15/32, lowering its yield 1.1 basis points to 5.859%.

At the

Chicago Board of Trade

, the September

Treasury futures contract added 1/32 to 97 23/32.

Oil was the catalyst for the move in Treasuries, as the oil futures market, which was closed on Monday, got the chance to react to Monday's report that Saudi Arabia's oil minister said the country would start pumping an additional half million barrels a day in order to bring prices down from current levels. Oil prices are near highs for the year.

Crude oil for August delivery, which closed at $32.50 a barrel on Friday, traded as low as $27.55 a barrel today. Meanwhile, the 10-year Treasury note traded up as much as 19/32 in the mid-morning as oil tumbled.

But contradictory comments by

OPEC's

president, reported around midday, broke oil's fall and undid much of the bond rally. Ali Rodriguez, Venezuela's energy minister and the OPEC head, told

Reuters

that Monday's report "was simply a journalistic interpretation. It was not what the minister said."

"The whole oil factor which gave

the bond market a strong boost overnight and at the open fizzled out gradually as the day progressed," said Anthony Karydakis, senior market economist at

Banc One Capital Markets

in Chicago.

Meanwhile, even in the absence of key economic news, bond investors continued to discount even lower odds that the

Fed will hike interest rates again at its next meeting on Aug. 22. As implied by the

fed funds futures contracts listed at the CBOT, those odds fell to 46% today from 56% Monday.

This may reflect speculation that the May employment report will be weak and drive the odds down further.

"Until we reach the point where we can be confident that the Fed is sidelined for the next several months, the market can't go a whole lot higher," Karydakis said. "But Friday's report has the potential to unleash a considerable amount of upside potential here. Friday could settle the issue, but only if the data overall come out on the soft side."

Economic Indicators

In other economic news, the weekly retail sales reports were decidedly unimpressive. The

BTM Weekly U.S. Retail Chain Store Sales Index

(

definition |

chart) fell 0.4%, its largest decline in 14 weeks. And the

Redbook Retail Average

(

definition |

chart) found June sales trailing May by 0.2% after the fifth and final week of June.

Also, the

leading economic indicators

(

definition |

chart) fell 0.1%. It was dragged down chiefly by a shorter manufacturing workweek, lower stock prices, higher

initial jobless claims

(

definition |

chart) and a drop in

building permits

(

definition |

chart).

Currency and Commodities

The dollar rose against the yen and fell against the euro. It lately was worth 107.02 yen, up from 106.12. The euro was worth $0.9528, up from $0.9507. For more on currencies, please take a look at

TSC's

Currencies column.

Crude oil for August delivery at the

New York Mercantile Exchange

fell to $30.28 a barrel from $32.50.

The

Bridge Commodity Research Bureau Index

fell to 219.39 from 223.93.

Gold for August delivery at the

Comex

fell to $285.30 an ounce from $291.50.