Treasurys slide as wholesale inflation surges

Bond prices dropped for a third straight day Wednesday amid higher-than-expected inflation numbers for June and a growing appetite for risk.

The decline in prices pushed yields sharply higher, which can be worrisome for consumers because long-term Treasury yields are closely linked with interest rates on mortgages and other types of loans.

Investors moved out of Treasurys after the Labor Department said its Consumer Price Index rose 0.7 percent last month, due mainly to a huge spike in gasoline prices. It was the fastest increase in 11 months and modestly worse than economists' forecast of 0.6 percent.

Treasurys often sell off at the slightest hint of inflation, because it eats into the value of a bond's fixed returns over time.

A surge in stock prices also hurt Treasurys Wednesday. Investors' appetite for risk increased following an upbeat outlook from Intel Corp., which the market took as an indication that the recession is easing its grip on consumers' wallets. In other signs of investors becoming more comfortable with risky assets, the dollar fell, while commodities rose.

As the Dow Jones industrials soared 257 points, the benchmark 10-year Treasury note dropped 1 4/32 to 95 31/32, pushing its yield up to 3.62 percent from 3.47 percent late Tuesday. The yield is still down from an eight-month high of 4.01 percent hit on June 10.

The 30-year bond tumbled 1 26/32 to 95 31/32 and its yield rose to 4.50 percent from 4.38 percent.

The two-year note fell 5/32 to 100 6/32. Its yield rose to 1.03 percent from 0.95 percent.

The yield on the three-month T-bill was unchanged at 0.17 percent. Its discount rate stood at 0.18 percent.

Treasurys have been beaten down this week following a jump in wholesale inflation numbers on Tuesday and a big gain in stocks on Monday that was sparked by hopes for better earnings reports from banks.

After falling this spring on increased optimism that the economy was healing, Treasurys have recovered since mid-June as investors began to question how soon the recession would end.

This week investors are finding some good news in a handful of upbeat earnings reports and outlooks from companies, as well as some more encouraging economic data.

Treasurys tend to perform well during times of economic distress as investors seek safety, then sell off once signs of recovery emerge.