US Treasury debt sold off for a third session on Friday, sending benchmark yields to one-month highs as bearish technicals and growing inflation fears obscured a Katrina-related plunge in US consumer confidence.
The University of Michigan's sentiment index fell to a 13-year low in September, but the market was too worried about an accompanying spike in inflation expectations to glean any benefit from Americans' gloomy assessment of the economy.
"One-year inflation expectations spiked from 3.1 percent to 4.6 percent, by far the highest reading since 1990," noted Stephen Stanley, chief economist at RBS Greenwich.
Coupled with two regional surveys this week showing a huge jump in factory costs for September, the data suggested the Federal Reserve would err on the side of caution and continue raising interest rates to ward off price gains.
This prospect hurt Treasuries across the yield curve, with benchmark 10-year notes losing 16/32 for a yield of 4.28 percent, the highest since mid-August and sharply up from 4.21 percent Thursday.
The break above 4.25 percent, a key chart support level, exacerbated the selling. Two-year notes also took a hit, slipping 5/32 to yield 3.98 percent from 3.89 percent. "This move is a broader recognition that the Fed will continue tightening, that there will be significant fiscal stimulus after the hurricane and that there are significant risks to the inflation picture," said Joseph Di Censo, a fixed-income strategist at Lehman Brothers.
"The Treasury market has maybe had a moment of awakening here."
It was quite a brutal reality for bonds, too, since investors were reluctant to buy even on weak economic data given the underlying anxiety over inflation.
Five-year notes slid 10/32 for a yield of 4.07 percent, up from 3.99 percent. The 30-year bond dropped 31/32 to yield 4.57 percent from 4.51 percent.
Ultimately, the market failed to react to the plunge in confidence primarily because analysts have grown wary of such numbers in recent years.
They have not had a strong record of predicting actual spending, since consumers keep buying cars and homes in earnest even as they complain about their gloomy financial situation to sentiment surveys.
September's drop was unusually large, but that only reinforced a sense that it was simply a knee-jerk reaction to the hurricane rather than the start of a persistent trend.
The index slumped to 76.9 so far this month, the lowest since 1992, from 89.1 in August, according to sources who saw the subscription-only report. Expectations about the future also dived to a 13-year low.
"These are abysmal numbers, suggesting a deeply pessimistic consumer in the first half of September," said Christopher Low, chief economist at FTN Financial.
But again, strategists would wait for hard data on retail sales before they actually took any market positions based on the fallout of the Hurricane, and weekly chain store sales have so far proven resilient.