NEW YORK (CNN/Money) -
Bonds fell Friday as a spike in inflation expectations offset the chances that the Federal Reserve will take a break from interest rate hikes on grim consumer sentiment.
The 10-year Treasury note fell 14/32 of a point to 99-25/32 to yield 4.27 percent, up from 4.22 late Thursday. The 30-year note lost 27/32 of a point to 112-1/32 to yield 4.56 percent, up from 4.52 Thursday. Bond prices and yields move in opposite directions.
The two-year note lost 5/32 of a point to yield 3.97 percent, while the five-year note also fell 9/32 to yield 4.06 percent.
The University of Michigan's sentiment index hit a 13-year low in September, but investors chose to focus on the fact that inflation futures have spiked in the past few sessions.
"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.
Inflation hurts bonds as it erodes the value of the fixed interest-paying investment.
The outlook suggested the Federal Reserve would continue its monetary tightening campaign at its meeting next Tuesday, raising interest rates to ward off price gains.
The prospect of higher rates sent the 10-year yield as high as 4.28 percent, it's highest since mid-August. The break above 4.25 percent, a key chart support level, exacerbated the selling.
"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," Joseph Di Censo, a fixed-income strategist at Lehman Brothers, told Reuters.
The Fed is largely expected to raise rates another quarter of a percentage point to 3.75 percent, which may indicate a belief that higher energy prices are more of a inflationary threat than they are a threat to economic growth.
In currency trading, the dollar dipped against the euro, which bought $1.2237, up from $1.2220 late Thursday. The greenback rose against the yen, buying ¥111.35, up from ¥110.67.
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-- from staff and wire reports