The bond market stumbled again today amid deteriorating sentiment and rising oil prices, sending Treasury yields to their highest levels in nearly a month.
As oil benchmarks hit their highest levels since the 1991 Persian Gulf War, the benchmark 30-year Treasury bond fell 12/32 to 99 3/32, lifting its yield 3 basis points to 6.19%, the highest since Oct. 28. Shorter-maturity notes also added 2 to 3 basis points. No major economic indicators were released today.
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Crude oil for January delivery rose 3.3% to $27.01 a barrel on the
New York Mercantile Exchange
, its highest close since January 1991, after
confirmed it has stopped shipments. The pariah country rejected an extension of the latest six month phase of the
program under which it can export limited quantities of oil in exchange for food and medicine.
The bond market cares much more about the core rate of inflation -- which excludes volatile energy and food prices -- than it does about the overall rate of inflation. "But sooner or later we can't keep ignoring headline inflation numbers growing at a strong rate,"
Warburg Dillon Read
Treasury market strategist Mark Mahoney said. Paced by rising oil prices, the overall
Consumer Price Index
inflation rate has surged from 1.5% in October 1998 to 2.6% last month. Over the same period, the core CPI rate has fallen from 2.3% to 2.1%.
Oil isn't the whole story in the bond market though, Mahoney said. The market is also worried about the prospect of a strong November
next Friday. "The fear is that we're going to get a bad inflation number compounded with a bad payroll number and the market is going to take another leg down."
At the same time,
Deutsche Bank Securities
senior economist Joe LaVorgna said, the bond market remains biased to lose ground because of last week's
action. The central bank hiked the fed funds rate, the short-term interest rate it controls, to 5.5% from 5.25%, and released a
statement hinting that additional rate hikes may be necessary to slow the economy to a sustainable pace.
The trend is exacerbated, LaVorgna said, by the fact that the Fed action capped a big rally in Treasuries which was led by the longest-maturity issues, flattening the yield curve.
"Oil is an issue for the market, but given how much we flattened last week and how much we rallied, we're steepening out with a bias to the downside on price," he said. "The Fed certainly didn't close the door to more rate hikes, and this is generally what happens when the Fed raises rates. Unless we get very favorable economic data in the next month or so, I would say the bias is still toward lower prices."