US Treasury debt prices eased on Friday as data showing the US economy grew robustly in the third quarter despite a devastating hurricane season reinforced expectations for further interest rate hikes.
Dealers were also wary ahead of a week that would be packed with market-moving events, including a Federal Reserve meeting and key economic reports on inflation and jobs.
A rally in the stock market attracted funds away from government debt as well, leaving benchmark 10-year notes off 5/32 for a yield of 4.58 percent, up from 4.55 percent on Thursday.
The downward tug was stemmed by a tamer-than-expected reading of consumer inflation excluding food and energy and by signs that US wages were not rising very quickly.
It was a heavy week of selling for Treasuries, which yanked benchmark yields nearly 20 basis points higher and in the process forced some mortgage investors to dump some of their government bond holdings.
Dealers were mixed with regards to the future outlook for bonds, since much of it depended on how growth and inflation numbers turn out over the coming weeks.
New cycle lows in rate futures pushed the implied year-end federal funds rate to 4.28 percent from 4.26 percent on Thursday, with more rate hikes likely in 2006.
For now, the market's tone remained visibly negative, with five-year notes sagging 4/32 to yield 4.46 percent while the 30-year bond had slipped 4/32 to yield 4.77 percent.
Two-year notes retreated 2/32 for a yield of 4.39 percent, up from 4.35 percent.
Some knee-jerk selling also occurred in mid-afternoon after the indictment of Vice President Dick Cheney's top advisor, Lewis "Scooter" Libby, which triggered some reticence about US assets among investors.
But that reaction was short-lived, and many traders blamed the day's losses on more of the same - strong growth and signs of budding energy-related inflation should keep the Fed tightening monetary policy for the foreseeable future.
Robust spending among consumers and the government helped push third-quarter gross domestic product 3.8 percent higher, up from 3.3 percent in the previous quarter and above Wall Street expectations for a 3.6 percent gain.
Bond investors were relieved to discover that the core personal consumption expenditures index, the price gauge most closely watched by the Fed, actually expanded only 1.3 percent in the third quarter compared with 1.7 percent in the second.
On an annual basis, the core PCE was running at 1.9 percent, near the top of the central bank's presumed comfort range but still some cause for concern.
Traders were quite relieved to see that US workers' wages remain more or less stagnant. Compensation costs comprise a large part of business expenses and are therefore salary increases are often harbingers of broader inflation.
The Labour Department reported that its Employment Cost Index rose 0.8 percent in the third quarter, slightly ahead of the second quarter's 0.7 percent.
Yet in the past 12 months, overall employment costs have risen only 3.1 percent - the smallest rise in six years - and wage costs alone have advanced only 2.3 percent for the smallest gain on record.
But relief over subdued wages could not mask widespread worries about the need for further interest rate hikes, leaving yields near the ceiling of a newly carved, higher range.
Traders looked to 4.60 percent and 4.63 percent as the next key levels to be tested - perhaps as early as Monday depending on the outcome of a slew of economic figures.