Inflation Fears Again Chill The Markets

Anxiety over high inflation, which has preoccupied investors all week, sent bond prices falling today and pushed the interest rate on the benchmark United States Treasury note above 5 percent for the first time since last summer.

The stock market quickly followed suit, and shares suffered their biggest declines since March. The Dow Jones industrial average closed down nearly 200 points, or 1.5 percent.

Investors have pushed the yield on the 10-year Treasury note, which is used to set mortgages and corporate bond rates, higher over the last several days as new economic data raised concerns that inflation would not settle down as predicted. Analysts believe that at the very least, the Fed is now locked into holding interest rates steady for the rest of the year at 5.25 percent.

If the outlook for inflation worsens, however, the central bank might have to raise rates — a possibility that has sent chills through American financial markets this week.

Today was the third day that stocks fell on Wall Street. The Standard & Poors 500-stock index and the Nasdaq composite both declined almost 1.8 percent.

Treasury prices, which move in the opposite direction of yields, dipped further today. Yields on the two-year note, the 10-year note and the 30-year note all surpassed 5 percent. Sustained higher yields would lift the cost of borrowing for companies and consumers alike, squeezing corporate profits and making home loans more expensive.

I think the bond market is nervous about the direction of two things: U.S. economic growth, as well as long-term inflation expectations, Anton Pil, global head of fixed income at J.P. Morgan Private Bank, said. Thats probably the biggest issue right now.

Adding to the pressure on Treasury prices in the United States, the European Central Bank and the Reserve Bank of New Zealand both raised rates this week.

Investors had more new economic data to mull over today that suggested the job market remains strong and consumers are not pulling back as much as some had feared. Both of those factors added to the multiplying evidence that a rate cut by the Fed is unlikely anytime soon.

The Labor Department said today that claims for unemployment benefits declined by 1,000 to 309,000 for the week that ended June 2. Wall Street expected a slight increase.

And retailers, which reported last month that April was one of their worst monthly performances in recent memory, said today that sales bounced back in May.

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