US Treasury debt prices receded on Wednesday as falling oil prices and concerns about rising wages obscured a solid five-year note auction. Investors were worried that upward revisions to second-quarter unit labor costs could herald a more widespread inflation trend.
That might allow Federal Reserve officials to keep raising interest rates steadily despite the projected economic fallout from Hurricane Katrina - and all the more so if oil prices dip any further following a drop below $65 this week.
Chicago Fed President Michael Moskow implied as much, arguing in a speech that the US central bank needs to continue "appropriate monetary policy" to keep inflation well contained.
That left US benchmark 10-year Treasury notes 11/32 lower and yielding 4.16 percent, up from 4.10 percent on Tuesday. Two-year notes were off 3/32 for a yield of 3.86 percent, from 3.81 percent.
"Bond yields will have to back up because inflationary pressures are clearly on the uptrend," said Frank Hsu, director of global fixed income at Fimat. "Unit labor costs were revised up and I don't think oil prices will go down any time soon." This sentiment overshadowed an auction of $13 billion in five-year notes that drew surprisingly strong demand, over half of it from indirect bidders.
The category, which includes customers of primary dealers and foreign central banks, took a whopping $7.13 billion, or 55 percent of the deal, calming persistent worries about waning offshore demand for Treasuries.
The new notes were sold at a high yield of 3.902 percent and drew 2.61 times bids per dollar of debt on offer, well above the year-to-date average of 2.46.
Existing five-year notes turned positive for a moment but then caved to selling. In the afternoon, they stood 5/32 lower for a yield of 3.94 percent. The 30-year bond lost 30/32 to yield 4.42 percent.
Bonds had already kicked off the session on a sour note after sharp upward revisions to second-quarter US worker compensation stoked worries about inflation.
Unit labor costs grew at a 2.5 percent pace versus the 1.3 percent rate initially reported and well above forecasts of a 1.4 percent gain.