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U.S. Treasury securities found buyers on Tuesday thanks to falling oil prices, but activity fell well short of a rally. Prices ticked up and yields, which move in the opposite direction of prices, came off two-month highs reached on Monday.

There are two schools of thought regarding oil prices. One, high energy prices could slow the economy and lessen the need for Fed rate hikes -- a pro-Treasury stance; or two, high energy prices will cause inflation and the rate hikes will keep coming -- a negative for Treasuries. Current thinking is that inflation is a concern not only for the financial markets but for the Fed as well. So today's slide in oil prices was welcome by all.

There are no less than five Fed officials speaking at separate functions on Tuesday, and what they say will likely impact trading on Wednesday. The only report thus far quoted Dallas Fed president Fisher as saying that inflation is currently at the upper end of the Fed's comfort zone, indicating that credit tightening will continue. This statement was responsible for a turn around in Treasuries and a downward slide on Wall Street.

High Treasury yields on Friday, followed by even higher yields on Monday due to a huge jump in the 'prices paid' index of the ISM has put upward pressure on mortgage rates, which are based on Treasury yields. Today rates continued to inch higher, as today's small decline in yields had no effect.

A strong report on Factory Orders left the markets unmoved, as gains in August basically cancelled out steep losses in July. Orders rose 2.5 percent, mirroring a downwardly revised 2.5-percent loss the previous month. The good news in today's report, however, showed the inventory-to-sales ratio at 1.18 - the lowest since December 2004. This means it would take 1.18 months to sell inventory on hand.

Economic Concerns Push Stocks Under Water

Wall Street opened today's session with good gains all around. But Fisher's comments re-awoke concerns about inflation and rising interest rates. The three major indexes headed south and closed with substantial losses. But there were other pressures on the market, including a decline in the Dow Home Construction index brought about by a report that insiders at some homebuilders have increased the sale of their stocks.

The Dow Jones Industrials took a beating, with only four components closing in positive territory and two ending flat. Disney led with a 2.3-percent gain, followed by Boeing, which added 1.2 percent. Johnson & Johnson and Wal-Mart also posted small gains. The decline in oil sent Exxon down 3.1 percent, and GM fell by a like amount. But they were not alone. McDonald's lost 2.9 percent, and United Technologies, Caterpillar, Microsoft, Alcoa and Procter & Gamble - due to a downgrade -- each fell by well over 2 percent. Another four components shed more than 1 percent each.

A couple of big names in technology that trade on the NYSE had a negative impact on the tech-heavy Nasdaq. Texas Instruments fell 5.5 percent on a downgrade and Lexmark, which makes printers and supplies, plunged 29 percent after it lowered third-quarter estimates due to weaker demand for printer supplies. Microsoft shed more than 2 percent on word that it had called off discussions with four music companies in its bid to compete with Apple iTunes.

Telecoms were thwarted in their effort to boost the Nasdaq, although bellwether JDS Uniphase added 4.65 percent. Qualcomm also managed a 1.2-pecent gain, but Sun Microsystems, which climbed earlier due to its upcoming partnership with Google, closed with a small gain. In addition to Microsoft's 2-percent loss, Ericsson and Dell fell 1.7 percent each, while Oracle lost just over 1 percent.

At closing:

The Dow 30 Industrial Index fell 94.37 points (-0.90 percent) to 10,441.11; the Nasdaq Composite index slid 16.07 points (-0.75 percent) to 2,139.36, and the benchmark Standard & Poor's 500 Index lost 12.23 points (-1.00 percent) to 1,214.47.

The 30-year Treasury bond was up 11/32 in price with the yield falling to 4.60 percent from 4.62 percent on Monday.

The 10-year Treasury note rose 3/32 in price with the yield falling to 4.37 percent from 4.39 percent on Monday.

The 5-year Treasury note fell 1/32 in price with the yield falling to 4.23 from 4.24 percent on Monday.

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

The 30-year Conventional Fixed-Rate Mortgage was at 5.752 percent from 5.712 percent at Monday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.358 percent from 5.335 percent at Monday's close.

Coming Up:

The Institute of Supply Management's (ISM) index on non-manufacturing conditions in September, i.e., the service sector, is the only report scheduled for release on Wednesday, and its impact is generally minimal. The weekly report on oil inventories is also due and could move the markets. Excerpts from the speeches made this evening by Fed officials might also have a major impact on trading Wednesday. If FOMC members continue with hawkish comments regarding inflation and the potential for more rate hikes, this would keep upward pressure on Treasury yields and mortgage rates.

Carolyn Siegel

carolyn@interest.com

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