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NEW YORK (CNN/Money) -
Bond yields tested six-month highs Tuesday as investors shrugged off a downbeat consumer confidence report to focus on inflation expectations, oil prices and the upcoming Federal Reserve meeting that many believe will result in another quarter-point interest-rate hike.
The dollar fell against the euro and yen.
The benchmark 10-year note sank 22/32 holding at 97-4/32 to yield 4.53 percent, up from 4.45 late Monday. The 30-year bond lost 1-7/32 points to 109-9/32 to yield 4.73 percent, up from 4.66 the previous session. Bond prices and yields move in opposite directions.
In shorter-dated debt, the two-year fell 5/32 of a point to yield 4.33 percent. The five-year note dropped 13/32 of a point to yield 4.40 percent.
The Conference Board's consumer confidence sentiment index eased to 85.0 from 87.5 in September, hitting a two-year low and upsetting forecasts for a rise to 88.1. The employment picture was also worrisome, as the survey's measure of difficulty in finding work edged up to 25.3 in October, its highest reading since December 2004.
But the bond market ignored these readings to focus on what consumers have been doing rather than saying.
For one, they've continued to buy homes at a rate near the record pace set in June. Sales of existing homes were unchanged in September at a 7.3 million unit annual pace, versus forecasts that they would slip to a 7.2 million annual rate.
Real estate sales have recently helped propel the economy and push consumer spending higher.
Fed ahead
The market sold off as traders anticipated another quarter-point hike to the federal-funds rate, as Fed Chairman Alan Greenspan and company fight to stay ahead of inflationary pressures.
"We've seen an economy that shows inflationary pressure and has been very resilient through hurricane season," said Joseph Di Censo, fixed-income strategist at Lehman Brothers.
Bond investors loathe inflation, as it devalues fixed-income investments, and reports have been showing a run up in pricing pressure in volatile food and energy costs ever since gasoline prices began spiking last October.
And while economists debate if and when the higher energy prices will seep into core inflation measures, traders are watching for evidence that higher energy prices are here to stay.
After posting a decline Monday, crude prices gained 3.5 percent in Tuesday's session and natural gas prices soared. Markets also braced themselves for Wednesday's government report on fuel stockpiles, forecast to show an 800,000 barrel drop in distillate stocks, which include heating oil and diesel fuel.
Bernanke factor
Monday's announcement by President Bush that Ben Bernanke is his choice to lead the Federal Reserve after Alan Greenspan steps down early next year also weighed on Treasury prices.
Bernanke is expected to continue Greenspan's inflation-fighting policy if he meets approval by lawmakers, although in a pre-nomination interview he said that inflation is not spreading.
Treasuries sold off Monday on concerns over how Bernanke will lead in the months ahead.
"Right now, you have Treasuries losing ground on the element of uncertainty in any transition -- though Bernanke is a known quantity and everyone knew we were losing Greenspan at the end of January," John Canavan, a bond market analyst at Stone and McCarthy Research Associates, told Reuters.
In currency trading, the euro bought $1.2108, up from $1.1949 late Friday. The dollar bought ¥115.03, down from ¥115.45 late Monday.
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For updated bond charts, click here.
Bernanke says inflation isn't spreading. Click here for more.
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