NEW YORK (CNNfn) - Treasury bonds fell for the second straight session Monday as traders, reassessing last week's big rally, sold bonds to make room for the government's $32 billion sale of new debt.
Analysts also called the weakness a continuation from Friday, when the latest evidence of the economy's strength fanned fears of more Federal Reserve interest rate hikes ahead.
Just before 3 p.m. ET, the 30-year Treasury bond fell 26/32 to 97-8/32. Its yield, which moves inversely to its price, rose to 6.33 percent from 6.27 percent Friday. The yield on the 10-year note -- now considered the better benchmark of inflation expectations after the 30-year's rally last week -- rose to 6.63 percent.
The losses follow big gains last week, which came as investors snapped up the government's shrinking supply of bonds.
Explaining the day's sell-off, Kevin Flanagan, bond trader at Morgan Stanley Dean Witter, said last week's rally may have been overdone.
"Those (low) yields are not sustainable even in an era of if shrinking supply," Flanagan said.
Reflecting this belief, the inverted yield curve, when shorter-term securities, like bills and notes, yield more than bonds, flattened somewhat Monday, as 30-year bonds bore the brunt of the selling.
Investors typically demand higher yields on longer-term debt to compensate for the risk that inflation will erode the value of their holdings over time. But bond yields plunged relative to note and bill yields last week after the Treasury Department said it will reduce the amount of long-term debt it borrows.
More issuance on the way
The day's losses come as the Treasury plans to sell a reduced $32 billion in new securities this week, auctioning $12 billion in 5-year notes on Tuesday, $10 billion in 10-year notes on Wednesday and $10 billion in 30-year bonds
on Thursday.
Bond dealers often unload some inventory to make room for a big slate of new bonds. Monday was no exception.
The day's sell-off continued from Friday, when a government report showing surprisingly strong job growth and record low unemployment gave Federal Reserve inflation fighters one more reason to hike interest rates.
In the report, the Labor Department said 387,000 non-farm jobs were added to the economy in January, nearly double forecasts. Average hourly earnings rose 6 cents, above expectations, to $13.50. And the unemployment rate slipped to a 30-year low of 4 percent.
"The employment report caused investors to reassess economics," Morgan Stanley Dean Witter's Flanagan said.
The Fed, the U.S. central bank, raised its main lending last week rate by a quarter point to slow the economy and preempt rising inflation.
The move to increase borrowing costs is the Fed's fourth effort since June to tap the brakes on an economy in a record expansion. But despite the Fed moves, consumer spending and confidence are strong, unemployment is at a 30-year low, and soaring stock markets have created trillions of dollars in paper wealth.
As such, analysts see at least one more rate hike ahead.
In the latest sign that inflation may pick-up, gold prices surged to a four-month high Monday, jumping to $316.60 per troy ounce in London, a $23 rise from Friday.
"The recent rally in gold is a further sign that the recent period of
disinflation is over and that inflation will be notching higher," said Tony Crescenzi, bond strategist at Miller Tabak & Co.
Dollar rises
The dollar rose against the yen and euro Monday, continuing last week's strengthening trend.
Analysts linked the dollar's buoyancy to expectations of higher U.S. interest rates, which makes dollar-denominated securities more attractive to overseas investors.
Furthermore, the U.S. economy continues to outperform its overseas counterparts. United States gross domestic product jumped 5.8 percent in the fourth quarter. Japan's economy in the same period is expected to contract.
Just before 3 p.m. ET, the dollar rose to 108.77 yen from 107.23 Friday.
The euro, meanwhile, fell to 98.05 cents from 98.31 cents Friday. 
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