A favorable producer price index failed to support an upswing Friday, as market participants decided low inflation is old news and profit takers moved in to book their gains.
The long bond finished the day down 7/16, to yield 7.62%.
Some market participants have suggested inflation fears were a factor in keeping a lid on any upward trend, but Friday's news and subsequent market reaction suggest otherwise.
The Labor Department reported that the producer price index for June rose just 0.2%, in line with market expectations. The core rate, which excludes food and energy, fell 0.1%. The unexpected decline was the first drop in more than five years.
After the 30-year bond moved almost 3/8 point higher in reaction to the announcement, profit takers killed the upswing. The erosion continued throughout the day amid extremely light Friday activity.
"I think only shocking news is important on inflation figures, because everyone is focused on the slow growth in the economy," said Paul Lally, an economist with R.H. Wrightson & Associates.
"The PPI is really not new news so the market didn't bother with it," he explained. "Everybody expected a better reading in June after last month's shocker."
The May producer price index, reported last month, rose 0.4%.
Kathleen Stephenson, a money market economist at Donaldson, Lufkin & Jenrette Securities, agreed this week's indicators will be more important for the market than Friday's index.
On the list for release this week are three June indicators that analysts say will be particularly significant: tomorrow's retail sales report, and Thursday's housing starts figure.
Ms. Stephanson said she expects the numbers to show continued economic weakness, which would give a boost to Treasury prices but probably not have much immediate effect on Federal Reserve policy.
Mr. Lally, however, said he expects retail sales to increase 0.8%, mostly in the auto sector, which would indicate the economy is not as weak as recent poor employment results would suggest.
"That may cause some concern for the credit markets, but it may also lighten the load the Fed is carrying" to ease rates, he said.
One trader said inflation concerns are being outweighed by the political uncertainty in Washington.
"The market continues to reflect not the Fed's policy, but the policy in Washington," he said.
The Democratic National Convention, which begins today in New York City, will be watched for any rhetoric that might suggest which way the Democrats would lead the economy should they take the White House in November.
The September bond futures contract closed down 5/16 at 102-12/32.
In the cash market, the 30-year 8% bond was 7/16 lower, at 104-6/32-104-10/32, to yield 7.62%.
The 7-1/2% 10-year note was down 7/32, to 104-1/32-104-5/32, to yield 6.90%.
The three-year 5-7/8% note was down 1/32, at 102-20/32-102-22/32, to yield 4.84%.
In when-issued trading, the 6-3/8% seven-year note was 3/32 lower, at 99-20/32-99-24/32, to yield 6.42%.
Rates on Treasury bills were mixed, with the three-month bill up two basis points at 3.23%, the six-month bill unchanged at 3.28%, and the year bill one basis point lower at 3.45%.