It was a mixed day for the bond market, which managed to shake off most of today's economic releases. However, the weakness, as has become customary, was again in the short end, as traders continued to adjust for the expectation that the Federal Reserve will get more aggressive on raising interest rates in coming months.

After yesterday's double whammy of the first-quarter

Employment Cost Index and

Gross Domestic Product reports, there are increased expectations that the Fed will raise the short-term fed funds target by 50 basis points at the May 16

Federal Open Market Committee


The fed funds rate is currently 6%, and a poll published late yesterday shows that 12 of 29 primary dealers in government securities expect the Fed to raise the funds rate by the "Big 5-0" come May 16.

That had the effect of pushing up yields in the short end of the curve, while yields in the long end remained reasonably steady. Traders engineered what's known as a curve-flattening trade, which is a bet that the long end will continue to rally and the short end will continue to sell.

Since changes in the two-year note are linked prominently to how the market views Fed policy, it sold off again today, dropping 4/32 to 99 13/32, driving the yield up to 6.689%, highest since Feb. 17. Meanwhile, the benchmark 10-year note was unchanged at 101 31/32, yielding 6.225%. The 30-year bond rose 7/32 to 103 29/32, dropping the yield 4 basis points to 5.969%.

"I think some people took some profits, and then some people were entering fresh curve-flattening trades within the front end of the curve," said Roseanne Briggen, market strategist at

MCM Moneywatch

. "There's heightened expectations that the Fed is going to go 50, and so people should be short the short end of the market."

Next week's economic data are going to be very important in terms of that debate.

Productivity and unit labor costs figures are released Thursday, followed by the Friday release of the

employment report. Productivity is expected to rise 4.1%, according to market estimates, although

Barclays Capital

economists are expecting only a 2.5% increase.

Economists are expecting an increase of 340,000 in new nonfarm payrolls in April, according to figures compiled by

Barclays Capital

. The

unemployment rate

is expected to fall to 4%, although a 3.9% figure would probably raise an eyebrow at Fed headquarters. Average hourly earnings are expected to rise 0.3% in April, according to Barclays.

In addition, the Fed's

Beige Book, an anecdotal summary of economic conditions around the country, is released Wednesday. Again, more evidence of inflation pressures would have its greatest impact on the short end of the curve.

"I think two-year notes are priced at fair value considering a 6.5% fund rate, but it will come under pressure given signs of inflationary pressure," said Gemma Wright, director of market strategy at Barclays. "I wouldn't be surprised to see the two-year get back up to 6.80% to 6.90%."

Today's economic data were mixed.

Personal income

rose 0.7% in March, after a 0.4% increase in February, while


rose just 0.5%, after a February increase of 1.4%, the

Commerce Department

said this morning. This is the first month that personal income rose more than spending since October.


Chicago Purchasing Managers' Index, an index of manufacturing sentiment in the Midwest, fell to 56.5 in April, from 57.4 in March. The

University of Michigan

Consumer Sentiment Index rose to 109.2 in April from 107.1 in March. The April figure was revised down from a preliminary estimate of 110.2.

Currency and Commodities

The dollar rose against the yen and the euro. It lately was worth 108.16 yen, up from 106.40. The euro was worth $0.9089, down from $0.9098. For more on currencies, see TSC's

Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

rose to $25.70 a barrel from $25.42.


Bridge Commodity Research Bureau Index

rose to 211.15 from 211.10.

Gold for June delivery at the


fell to $274.8 an ounce from $278.40 yesterday.