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Selling in U.S. Treasury securities continued on Thursday amid fresh signs of inflation and the rate hikes that it will bring. Investors baled out of longer-term issues that are more adversely affected by inflation, as it erodes their value to a greater degree. Aggressive selling sent Treasury prices down even further during a week that has seen yields, which move in the opposite direction of prices, soar. The increase in yields, which lenders use as a guide to set mortgage rates, has sent the rate on the 30-year fixed to its highest level since March. And rates on many adjustable mortgages are higher than they have been in more than a year.

One of the pressures on Treasuries came from an unexpected source. U.S. import/export price indexes for the previous month are generally acknowledged then ignored, but traders could not dismiss the 2.3-percent rise in import prices - the biggest one-month increase in 15 years. Although the sharp spike in prices was tied to increases in energy, many feel it is only a matter of time before those increases will show up at the retail level. Excluding oil, import prices rose only 1.2 percent, and when all fuels were omitted, prices were up a mere 0.4 percent. But in the real world it is getting more difficult to exclude oil prices. Export prices - excluding agriculture - rose 0.4 percent.

Another increase in the U.S. trade deficit for August - the third largest on record -- stirred worries about the health of the nation's economy. The trade gap widened to $59 billion, which was $1 billion more than in July, but below forecasts for a $59.5 billion deficit. First-time unemployment claims for the week ended Oct. 7 fell to 389,000 from a revised 391,000 the previous week. It was announced, however, that 438,000 claims have been filed due to hurricane-related job losses. The more-telling four-week average, which smoothes volatility, also fell to 395,750 from the previous 404,500 reading. Continued claims - people collecting benefits for more than one week - edged down to 2.87 million.

Nasdaq Rebounds, Dow and S&P 500 Flat

After what could only be termed a terrible week for the Nasdaq, the tech-heavy composite closed in positive territory. The Dow Jones Industrials, however, ended close to unchanged, with a slide in oil prices bringing some relief. Volume was light as many investors were absent due to Yom Kippur, while others were cautious on the day prior to the release of the Consumer Price Index and Retail Sales for September.

Seventeen Dow components closed to the up side, with Johnson & Johnson in the lead with a 3.6-percent increase due to favorable press. GM and JP Morgan also put up some strong numbers, adding 1.7 percent and 1.4 percent, respectively. Microsoft, AIG and McDonald's, which reported strong same-store sales for September, each added more than 1 percent.

Of the 13 Dow components to close negative, five suffered sizable losses. Altria led with a 1.9 percent loss followed closely by Boeing, which shed 1.7 percent. Caterpillar lost 1.4 percent for the second consecutive day, and Exxon was right behind with a 1.3 percent decline. The last of those to drop more than 1 percent was DuPont, with a 1.14 percent loss.

The Nasdaq, which shed more than 2.5 percent over the first three days of the week, fought back on Thursday with some success. Chip gear maker Lam Research rose 11.75 percent after beating estimates and receiving an upgrade. Chips benefited and opened the door to bargain hunters. This resulted in some good gains by tech bellwethers, led by a 3.6 percent increase by JDS Uniphase. Also on the plus side were Dell, which added 1.4 percent, and Microsoft with a 1.2 percent increase. Yahoo! was down 1.7 percent and Qualcomm fell 1.5 percent.

At closing:

The Dow 30 Industrial Index dropped 0.32 points (-0.00 percent) to 10,216.59; the Nasdaq Composite index rose 9.75 points (+0.48 percent) to 2,047.47, and the benchmark Standard & Poor's 500 Index slid 0.84 points (-0.07 percent) to 1,176.84.

The 30-year Treasury bond was down 18/32 in price with the yield rising to 4.69 percent from 4.66 percent on Wednesday.

The 10-year Treasury note was down 6/32 in price with the yield rising to 4.46 percent from 4.45 percent on Wednesday.

The 5-year Treasury note was down 7/32 in price with the yield rising to 4.32 percent from 4.31 percent on Wednesday.

At 4 p.m. EDT, AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage rose to 5.817 percent from 5.797 percentat Wednesday's close.

The 15-year Conventional Fixed-Rate Mortgage climbed to 5.417 percent from 5.404 percent at Wednesday's close.

Coming Up:

A slew of market movers is on tap for Friday, namely the Consumer Price Index (CPI) and Retail Sales for September, along with the University of Michigan's preliminary consumer sentiment report for October. The CPI, which looks for inflation at the retail level, is expected to jump to 1 percent after climbing 0.5 percent in August. The core index, which excludes volatile food and energy prices, is forecast to rise 0.2 percent, double the previous 0.1 percent increase. Such an outcome might set well with bond traders, but a big jump in retail sales would not. The forecast for a 0.6 percent increase in sales is sharply higher than the 2.1 percent decrease the previous month. Excluding auto sales, retail sales are estimated to climb 1.1 percent. Consumer sentiment is forecast to rise to 81 from 76.9 posted two weeks ago. Business inventories for August are expected to rise 0.1 percent, as opposed to a 0.5 percent decline in July. This report, however, will not be a factor.

Any signs of growing inflation or a confident and spending consumer would likely have a negative impact on Treasuries. This would send prices down and yields even higher, which could allow mortgage rates to climb with them.

Carolyn Siegel

carolyn@interest.com

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