U.S. Treasuries got hammered Tuesday on the heels of stronger-than-expected economic data, most notably retail sales.

The price of the benchmark 10-year Treasury fell 29/32 to 97 8/32, its yield rising to 4.35%, the highest level in more than three months. The 30-year bond was also dinged, with yields rising to 5.15% from 5.06%.

Rising Treasury yields contributed to

widespread weakness in equities. Both asset classes reacted to the growing likelihood of

Federal Reserve

tightening sooner vs. later. In addition, higher yields undermine the relative attractiveness of stocks vs. Treasuries.

The fixed-income selloff was triggered by March retail sales that came in at 1.8%, which was much higher than the 0.7% the market was expecting. The strong March sales followed an upward revision of retail sales in February to 1% vs. 0.7% originally; January retail sales were also revised higher.

In addition, business inventories were reported to have risen 0.7% in February, above consensus expectations and a sign of growing optimism at corporations. Treasuries were also hurt by reports the U.S. government budget deficit widened to $72.7 billion in March from $58.9 billion in February. The supply of Treasuries is expected to rise sharply to help fund the yawning deficit; economists predict a record $177 billion in Treasuries will be put up for sale this quarter.

Paul Kasriel, director of economic research at Northern Trust, said the bond market was spooked, largely because it's getting more and more difficult to ignore the strong economic data that keep pouring in.

"What's happening is that we're beginning to get a string of stronger numbers," Kasriel said. "The strong employment data started it off, then the lower jobless claims last week."

Since the March employment data were released on April 2, yields on the 10-year note have risen 47 basis points.

What's more, "there is probably some apprehension about Wednesday's consumer price index data," Kasriel said, suggesting Tuesday's weak bond market could be signaling that there is some upward risk to that CPI number.

Consensus expectations are for 0.3% growth in March CPI and a 0.2% rise in the core rate, which excludes food and energy.

Finally, and perhaps most crucially, "the notion that the Fed is on hold for the rest of the year is perhaps being eroded," Kasriel said. (The yield on September Eurodollar futures rose 5.5 basis points to 1.535% Tuesday,


reported, an indication of rising market expectations for Fed rate hikes.)

In a note earlier this week, the economist forecast "a 50-basis-point hike at the August FOMC meeting and then no more fed funds increases until early 2005."

The analysis was based on three components: "Firstly, the employment environment appears to be improving. Secondly, so-called core inflation appears to have bottomed. Thirdly, inflation expectations appear to be rising," he wrote.

While the strong economic data weighed on Treasuries, which are acutely sensitive to changes in monetary policy and/or inflation expectations, it helped the dollar rise to 106.58 yen vs. 105.35 late Monday. The euro slid to $1.1949 vs. $1.2071. Strength in the greenback, in turn, helped send gold futures down 3.1% to $407.70 per ounce, its lowest close since March 17.