Bonds dragged lower by inflation fears

NEW YORK (CNNMoney.com) -- Treasury prices fell Tuesday after a surprisingly strong consumer confidence reading nurtured inflation fears and concerns that the Federal Reserve may have to raise interest rates.

The dollar edged down against both the euro and yen.

The 10-year benchmark bond dipped 4/32, or $1.25, to yield 4.88 percent, up from 4.86 percent in Friday's session. Markets were closed Monday in observance of Memorial Day.

The 30-year eased 4/32, yielding 5.01 percent, up from 5 percent Friday. Bond prices and yields move in opposite directions.

The 5-year note fell 5/32, yielding 4.83 percent and the 1-year edged down 2 ticks to yield 4.90 percent.

Bonds prices retreated following the May consumer confidence reading which came in above forecasts at 108, according to the Conference Board.

The surprisingly higher figure could signal underlying inflation, making a rate hike more likely, which makes bonds less attractive to investors.

Concerns that the Federal Reserve may have to raise interest rates and the May employment report due out Friday also weighed on a Treasury auction of 2-year notes on Tuesday, which garnered weaker than expected demand.

Right now, futures markets have the chance of the Federal Reserve cutting interest rates at 44 percent, down from 50 percent before the consumer confidence reading.

"The inflation expectations suggest the Fed is right to remain on guard against the possibility of future inflation," Scott Brown, chief economist with Raymond James & Associates in St Petersburg, Florida, told Reuters.

Besides Friday's jobs report, bond traders will have plenty of data to look at this week including a reading on first-quarter GDP, due out Thursday.

The euro bought $1.3448 up slightly from $1.3445 Friday, while the dollar bought ¥121.59 down from ¥121.72.

--from staff and wire reports.