US Treasury debt prices retreated on Monday as investors worried a data-filled week could reinforce the need for more interest rate hikes from the Federal Reserve.
Many of the figures will not yet reflect possible fallout from Hurricane Katrina since they will not cover the period after the storm. However, analysts will comb through them in an attempt to gauge whether a recent recalibration of monetary policy forecasts was appropriate.
After the hurricane, investors rushed to reprice interest rate futures on the expectation that the storm's economic impact would be so large that the Fed would need to stop raising interest rates.
But now that the dust had settled and central bank officials have had a chance to chime in, strategists were beginning to see a near-term pause as less likely.
"It's been pretty clear from Fedspeak that they intend to hike in September, and that they will exhibit temporary flexibility if they see weakness," said David Ader, US government bond strategist at RBS Greenwich Capital.
Dallas Fed President Richard Fisher on Monday said the US economy would rebound from the hurricane but that the policy impact of the devastation was not yet clear.
Fearing such indecision would mean further monetary tightening in the short-run, benchmark 10-year notes slipped 14/32 for a yield of 4.18 percent, its highest level in two weeks and up from 4.12 percent on Friday.
This week's inflation figures both at the consumer and producer levels presented another risk to Treasuries, since it is thought that any marked pick-up in prices would force the Fed's hand regardless of the growth picture.
With such hurdles in mind, five-year notes fell 7/32 for a yield of 3.99 percent, compared with 3.93 percent Friday. The 30-year bond lost 24/32 to yield 4.45 percent, while two-year debt eased 2/32 and was yielding 3.92 percent.
Traders said some overseas selling of German Bunds after a delay in the application of new rules for Dutch pension reform was spilling over into longer-dated Treasuries. Hedging related to a hefty slate of upcoming corporate debt issuance was also depressing government bonds, analysts said.
But perhaps most importantly, investors seemed to be questioning whether the market had gone too far too fast after benchmark yields hit two-month lows in the wake of Katrina.
"We expect the Fed to focus on the risks to higher inflation caused by higher energy prices, supply-chain disruptions and the strain on resources resulting from the massive rescue, relief and rebuilding effort now underway," said Colin Lundgren, head of institutional fixed-income at RiverSource Investments in Minneapolis,
Central bank officials last week offered conflicting views. The Chicago Fed's Michael Moskow focused more on creeping inflation while his San Francisco counterpart Janet Yellen appeared more eager to acknowledge the effects of Katrina.