US Treasury debt earned a second day of reprieve from a month-long sell-off on Wednesday, but small gains in the face of a huge drop in services activity bore testament to persistently bearish investor sentiment.
Hanging over the market was the gathering realisation that the Federal Reserve has no intention to stop raising interest rates any time soon, particularly amid growing evidence that higher energy costs were fuelling broader inflation.
The September US services sector survey from the Institute for Supply Management was only the latest report to show that producers were feeling the pain of rising prices.
Such increases were in fact partly responsible for the dramatic pullback in services activity that followed Hurricane Katrina, with the sector posting its weakest performance in two and half years.
Yet benchmark 10-year notes were up only 5/32 in price in the afternoon, a moderate uptick given the magnitude of the retreat in services. Yields dipped to 4.35 percent, down from 4.37 percent on Tuesday.
"The market is still bearish medium term - the ISM data kind of plays into that outlook," said Josh Stiles, senior bond strategist at IDEAglobal. "Prices paid really rocketed higher."
Inflation fears had already conjured up consistent reminders from central bank officials about the need for further monetary tightening, with Kansas Fed President Thomas Hoenig only the latest to offer his input.
Hoenig said that even before Katrina, energy prices were having a significant impact and warned that higher natural gas costs could hurt consumer psychology as winter approaches.
Hoenig's counterpart at the Philadelphia Fed, Anthony Santomero, late Tuesday offered perhaps the central bank's most explicit case to date for higher benchmark interest rates.
He argued further monetary tightening was needed to prevent what he called temporary price pressures from permanently raising the inflation level.
Faced with such crystal clear signals from the Fed, even bond-friendly data could not lift two-year notes any more than 1/32 higher in price. The notes were yielding 4.20 percent, down from 4.22 percent on Tuesday.
Five-year notes added 2/32 to yield 4.22 percent from 4.24 percent, while the 30-year bond climbed 16/32 to yield 4.57 percent, down from 4.60 percent.