Treasurys fall on inflation worries
Government bond prices fall hard, after a report shows that climbing gas and food prices drove inflation to the biggest annual jump since 1991.
NEW YORK (CNNMoney.com) -- Bond prices sank on Wednesday amid fresh concerns over inflation, after the most recent Consumer Price Index report showed a surprising surge.
Comments by Federal Reserve Chairman Ben Bernanke before the Senate Banking Committee and a rally in the stock market also kept downward pressure on Treasurys.
The benchmark 10-year note fell 31/32 to 99 14/32 and yielded 3.94%, up from 3.82% late Tuesday. Bond prices and yields move in opposite directions.
The 2-year note fell 3/32 to 100 27/32, and its yield rose to 2.41% from 2.36% late Tuesday. The 30-year long bond fell 2 1/32 to 96 17/32; its yield rose to 4.59% from 4.46% in the previous session.
Inflation concerns. The Labor Department reported that the Consumer Price Index, a key inflation gauge, surged 5% in the past year, which is the biggest jump in more than 17 years. The report indicated that record gas and food prices helped the index soar to levels that outpaced the average annual pay increase.
The report "obviously suggests that the food and energy hikes are now being infiltrated to other sectors of the economy," said Peter Cardillo, chief economist at Avalon Partners.
Inflation concerns push bond prices down. Inflation devalues the fixed return of government bonds, and so "investors are going to demand more of a return" from their investments, said Cardillo. When investors demand more return from a bond, the yield increases, which means that bond prices fall.
On a monthly basis, the Consumer Price Index was up 1.1% in June, after a 0.6% rise in May. The so-called core CPI, which excludes volatile food and energy prices, rose 0.3%, after a 0.2% rise in the prior month.
"This report suggests that the Fed needs to address the inflation problem," said Cardillo.
Inflation has remained high and "seems likely to move temporarily higher in the near term," Bernanke told lawmakers on Tuesday.
In addition to the core CPI increase, Bernanke's comments before the Senate Banking Committee "once again reiterate inflation problems," said Cardillo. Bernanke's comments added to the inflation fears, pushing the price of bonds down further.
Stock rally keeps bonds in check. In typical fashion, the bond market is moving opposite to equities, which have found some support from lower oil prices.
The bond market is "reacting to the sharp gains in the stock market, which in turn is reacting to the drop in oil price for the second day in a row," said Michael Cheah, senior portfolio manager at AIG SunAmerica.
The stock market moved higher on Wednesday, prompting investors to move their assets out of what is seen as a safe haven in times of economic turmoil, in order to try and take advantage of the more profitable stock market.
The stock market was fueled by positive financial results from Wells Fargo (WFC, Fortune 500), Delta Air Lines (DAL, Fortune 500) and American Airlines' parent AMR (AMR, Fortune 500), along with oil prices. Oil prices plummeted on Wednesday, bringing a two-day selloff to as much as $11 per barrel, after the U.S. government's weekly inventory report suggested record-high gasoline prices may be reducing the nation's energy consumption. 
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