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Monday's gains by U.S. Treasury securities evaporated on Tuesday due to a flare-up in inflationary pressures and concern about future Fed rate hikes, as indicated by Fed Chairman Ben Bernanke in his speech last night in New York City.

Treasuries opened to the upside on news that the producer price index, or PPI, had taken a dive in February -- a sign that inflation at the wholesale level was under control. But a look at the core rate, which is what the Fed watches, showed signs of inflation on the horizon. And then traders looked closely at Bernanke's speech, which gave no hint that rate hikes are coming to an end. If anything, he appeared to be at ease with the current state of things, including the yield curve, which inverted again today. He said that he does not see inversion as a sign of a slowing economy, which traders read as a cue that the Fed could keep going.

Treasuries rallied yesterday, sending yields down, and mortgage rates, which are based on yields, edged down accordingly. But when Treasuries sold off today, their yields, which move in the opposite direction of price, rose, and mortgage rates began to climb back up.

The producer price index plunged 1.4 percent in February -- the steepest decline in almost three years. This was chalked up to sharp decreases in the prices of food and energy -- down 2.7 percent and 4.7 percent, respectively. But the PPI core, which eliminates volatile food and energy prices, rose by a stronger-than-expected 0.3 percent, when a 0.1 percent increase was forecast. Pair the February core increase with the 0.4 percent increase in the January core and you have signs of inflation that worried bond traders.

Reports on retail sales for last week showed declines. The ICSC-UBS chain store index showed sales at shopping centers across the nation fell 0.1 percent for the week ended March 18, versus a 0.1 percent increase the previous week. The Redbook, which compares sales on a month-over-month basis, reported them down 2.4 percent from the same week in February.

Stocks plunge after hitting highs

Stocks opened to the upside, spurred by falling Treasury yields and initial signs of low inflation. Both the Nasdaq composite and the Dow Jones industrials broke through resistance levels, only to head back down as inflation fears crept in and concern about interest rates climbed. Chips led the surge in the Nasdaq but folded as the session wore on. Internet stocks and networkers also had a tough session, as did brokerages and home builders, which pushed the Dow Jones home construction index down by more than 1 percent.

GM was the shining star of the Dow Jones industrials -- the only stock to gain more than 1 percent. The troubled automaker rose 5.5 percent on news that talks with its auto supplier and the UAW are nearing a deal. Ten other Dow components closed positive, but gains were small. Interest-sensitive shares of Alcoa and Caterpillar were down more than 2 percent, while Disney shed 1.9 percent and AIG and Altria lost about 1.5 percent each.

The Nasdaq composite lost traction when the chip rally folded. This was evidenced by Intel climbing 3.6 percent, only to end with a 0.8 percent increase. Gains in hardware -- IBM, Dell and Hewlett-Packard -- kept techs from worse losses, but negative closes by Cisco Systems, Sun Microsystems and Qualcomm were too much to beat. Oracle had a volatile session, after reporting strong quarterly earnings after the bell yesterday. The stock opened up today but fell into negative territory when the markets decided the earnings, which beat estimates, were not bullish enough.

As of 4 p.m. EST:

The Dow Jones industrial index closed down 39.06 points (-0.35 percent) to 11,235.47; the Nasdaq composite lost 19.88 points (-0.86 percent) to 2,294.23, and the Standard & Poor's 500 index fell 7.85 points (-0.6 percent) to 1,297.23.

The 30-year Treasury bond closed down 17/32 in price with the yield rising to 4.73 percent, from 4.69 percent on Monday.

The 10-year Treasury note closed down 11/32 in price with the yield rising to 4.70 percent, from 4.64 percent on Monday.

The five-year Treasury note closed down 8/32 in price with the yield rising to 4.66 percent, from 4.60 percent on Monday.

The two-year Treasury note closed down 4/32 in price with the yield rising to 4.71 percent, from 4.66 percent on Monday.

At 4 p.m. EST, average mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year conventional fixed-rate mortgage was at 6.114 percent, up from 6.1 percent on Monday.

The 15-year conventional fixed-rate mortgage was at 5.73 percent, up from 5.71 percent on Monday.

Coming up:

There are no economic indicators scheduled for release on Wednesday, which will force the financial markets to look elsewhere for guidance. Or they could just follow the path of least resistance and continue today's trends.

Mortgage rates will continue to edge up thanks to the steep increase in Treasury yields today.

Carolyn Siegel

Carolyn@interest.com

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