Treasury prices fell Wednesday after minutes from the Federal Reserve's last meeting and another spike in oil prices touched off renewed concern about rising prices.The minutes revealed that the central bank has raised its expectations for inflation for the year. The Fed now predicts inflation will come in at 3.1 percent to 3.4 percent, well above its earlier forecast of 2.1 percent to 2.4 percent. Rising prices can make it more difficult for bonds — which are already paying relatively low interest rates these days because of successive rate cuts — to keep pace with inflation.

The minutes that arrived Wednesday stem from the central bank's decision to lower its key interest rate by a quarter point to 2 percent in late April. The Fed's next scheduled meeting is still another month away — on June 24-25.



Scott Pollard, vice president of Atlanta-based YieldQuest Advisors LLC, noted that the inflation fears brought a rare simultaneous pullback in Treasurys and in stocks. As occurred Tuesday, stock market investors will often shift to the safety of government debt if stocks show sizable declines.

But the markets moved in tandem Wednesday — the Dow Jones industrial average was off more than 200 points after the release of the Fed's deliberations. And the blue chips ended down 227 points at the 12,601 level, bringing its losses over two sessions to 427 points.

"I think the one thing that drives equities and bonds is inflation and crude," Pollard said. Still, he thought a pullback had been overdue in any case. He contends recent gains in Treasurys have come too quickly without an adequate time for investors to size up the gains.

Oil prices served as another reminder of inflation on Wednesday as crude surged past $130 per barrel for the first time to settle up $4.19 at $133.17 on the New York Mercantile Exchange. Oil later moved past $134 in after-hours trading.

Beyond inflation worries, Robert Smith, chairman and chief executive of Smith Affiliated Capital in New York, said investors aren't likely to be aggressive heading into the long Memorial Day weekend. He said Treasury market investors are also awaiting further signs about the health of the credit markets.

"I think the market is kind of in limbo here pending any further credit events," he said. "At the same time petroleum has kind of fed peoples' anxiety about inflation and the Fed can't afford to drop rates anymore."

The benchmark 10-year Treasury note fell 7/32 to 100 17/32 and yielded 3.81 percent, up from 3.78 percent late Tuesday, according to BGCantor Market Data. Bond prices move in the opposite direction of yields.

The 2-year note, which is most sensitive to interest-rate changes, fell 4/32 to 99 16/32, and its yield rose to 2.39 percent from 2.31 percent late Tuesday.

The 30-year long bond declined 4/32 to 97 8/32 and yielded 4.54 percent, up from 4.53 percent late Tuesday.

In late trading, the 10-year yield was unchanged, while the 2-year note yield rose to 2.40 percent and the 30-year yield rose to 4.55 percent.

The 3-month Treasury bill's yield fell to 1.85 percent from 1.87 percent, and its discount rate rose to 1.94 percent from 1.84 percent late Tuesday.

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