Long-term Treasurys fell Tuesday after the latest wholesale price report raised concerns that a commodities rally has sent inflation spiraling throughout the broader economy.The Labor Department reported that producer prices rose by a full 1 percent last month, exceeding many economists' forecasts. The core rate, which strips out food and energy prices, rose 0.4 percent, twice the 0.2 percent estimate of analysts surveyed by Thomson/IFR. The high wholesale price figures exacerbated worries that inflation is accelerating at precisely the wrong moment as the economy cools. Commodities prices, particularly for oil and gasoline, have surged over the past year and contributed heavily to the increase in inflation.

The Treasury market carefully monitors inflation figures because the Federal Reserve is known to weigh this data in making monetary policy decisions. The Fed is thought to be more concerned about consumer price data than the wholesale figures. But the latest report could lead the central bank to back away from the recent rate cuts as cheaper money stimulates inflation.



Excessive increases in inflation also suggest that long-term rates will have to rise to keep up with the pressure on prices over time. On Tuesday, bond market investors sold 30-year long bonds to drive their up their yields, which move inversely to price.

But shorter-term maturities were lifted by weak consumer sentiment and housing price reports. Soft economic data often prompts demand for Treasurys which are seen as safe assets.

The 2-year note rose 4/32 to 100 5/32 with a yield of 2.03 percent, down from 2.12 percent late Monday, according to BGCantor Market Data. Prices and yields move in opposite directions.

The 10-year benchmark note gained 8/32 to 97 1/32 with a yield of 3.86 percent, down from 3.91 percent late Monday.

The 30-year bond fell 6/32 to 95 16/32 with a 4.68 percent yield, up from 4.67 percent.

The yield on the 3-month note rose to 2.22 percent from 2.20 percent as the discount rate advanced to 2.17 percent from 2.15 percent.

The day's other reports pointed to weakening economic fundamentals. The Conference Board's index of consumer confidence plunged in February to 75.0 from a revised 87.3 in January. The Standard & Poor's Case-Shiller monthly index of home prices dropped 9.1 percent in December from the year-earlier level.

Bill Gross, founder of PIMCO, the world's largest bond fund company, Tuesday warned that rising inflation is making Treasurys less attractive. But, in a piece on PIMCO's Web site, Gross also noted that other portions of the fixed-income market may hold opportunities. This week, investors will watch the response to some new corporate issuance from major corporations including Honeywell Inc. and McDonald's Corp.

The $330 billion auction rate securities market also is struggling to regain its footing, according to Bob Nelson a municipal bond market analyst at Thomson Financial. These are short-term notes issued by local governments that feature rates reset on a weekly or monthly basis at auctions.

Over the past few weeks, the lack of a market for these securities forced investors to hold onto a large number of securities that saw failed auctions. This in turn drove up borrrowing costs sharply from some municipalities.

There also are worries about a related market for variable rate demand securities, known as the "VRDO" market, Nelson said. These assets also have floating rates that reset every week or month. But rates in this asset classes are set by dealers and not at auctions.

Both auction rate and VRDO securities are causalities of the capital problems of major bond insurers. Doubts about insurers' ability to cover municipal bonds, if defaults on risky debts pile up, have sent investors scurrying out of the auction rate and VRDO markets this month.

The Fed continued to do its part to stimulate the financial markets on Tuesday, conducting a sixth in a series of special auctions that have pumped $160 billion into the banking system. The program is designed to provide extra reserves to commercial banks whose finances are strained by the aftermath of the subprime crisis.

The latest Fed operation added another $30 billion in funds to the system.