Bloomberg News

NEW YORK - U.S. bonds on Friday rounded out their first losing week in five weeks on concern that rising oil costs would spur inflation and prompt more Federal Reserve interest rate increases, though probably not at this week's Federal Open Market Committee meeting.

"For the bond market, the question is: What is the Fed going to do?" said Arthur Micheletti, who is holding off on bond purchases at Bailard, Biehl & Kaiser Inc. in San Mateo, Calif. As oil prices have risen, the focus has shifted, and bonds have fallen, he said.

The most actively traded 30-year Treasury bond fell 1 point, or $10 per $1,000 face amount, pushing yields to 6.03% - the first time they topped 6% in more than three weeks.

The most-active 10-year note fell 0.59375 to 102.25. The yield rose eight basis points, to 6.18%.

For the week, Treasury bonds fell 2.375 points, cutting year-to-date returns to 9%, including price gains and interest; it was the biggest weekly loss since early May.

Bonds fell as investors fretted that the Fed's six rate increases in the last 12 months may not have done as much to slow the economy and quell inflation as was indicated in the past month's economic data.

The central bank has already lifted its key lending rate by 1.75 percentage point, to a nine-year high of 6.5%, in an effort to keep a lid on inflation, which ran at a 3.1% pace in the 12 months through May.

That puts the 30-year bond's yield at 2.93% after inflation, or about 0.9 percentage point lower than the 3.85% average for the past five years.

Crude oil for August delivery rose 0.65%, to $32.40 a barrel, on the New York Mercantile Exchange, bringing the price rise for the week to almost 8%.

"Higher oil prices should start showing up in inflation numbers this month," and that's going to weigh on bonds, Mr. Micheletti said. "Yields are going higher."

Though signs of accelerating inflation may prompt Fed rate increases in the months ahead, most analysts said the central bank is unlikely to raise rates at this week's two-day policy meeting. Economists at all 29 of the primary traders in government securities - the firms that deal directly with the Fed - said in a survey this month that they expect no change when policymakers meet Tuesday and Wednesday.

Beyond this week, however, futures indicate that expectations for additional rate increases are rising. The yield on the September contract rose five basis points last week, to 6.74%, suggesting that investors are all but convinced Fed officials will raise rates by a quarter-point at their August meeting.

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