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U.S. Treasury securities gave back some of yesterday's gains on Wednesday thanks to an unexpectedly strong report on manufacturing activity. Bond traders took this report as a signal that the Fed might have to be aggressive with rate hikes if it is to keep economic growth under control and free from inflationary pressure. Selling in Treasuries sent prices down and yields, which move in the opposite direction of prices, slightly up. The uptick in yields, which are used as a guide to set mortgage rates, was not strong enough to influence lenders to make rate changes.

Treasuries opened to the downside and slipped further when the Federal Reserve's New York Empire State index on March manufacturing conditions came out. The index shot up to 31.2 -- the highest level since July 2004 - when pundits were expecting it to edge down to 19 from the previous reading of 20.3. The report - important because of the freshness of the data - was almost perfect if you were looking for growth. New orders and employment made substantial gains, and prospects for future business conditions were also on the plus side. 'Prices paid' - an indication of future inflation - fell.

Capital flows for January also disappointed bond traders, as the report showed only $4.4 billion was invested in U.S. Treasuries by foreign investors. This is far less than the $18.3 billion spent in December. It was also noted that the total capital flow of $66 billion (which includes the purchase of stocks as well as bonds) was less than the trade deficit. Some analysts argued that this was old data and had no real effect on today's market activities.

Equities build on Tuesday gains

Wall Street roared ahead on Wednesday, posting another round of big gains that sent the Standard & Poor's 500 index to its first close above 1300, since May 2001. Stocks got a bit of a boost from the Empire State index, and they were also bolstered by the Fed's so-called beige book, which reported good economic growth in the nation's 12 Federal Reserve Bank districts. Business spending and hiring were up across the board, while housing activity was mixed due to geographical differences. A welcome drop in oil prices, due to higher-than-expected inventories, added to the upbeat outlook. Oil fell 95 cents to $62.15 a barrel.

The Dow Jones industrials closed at their highest level in almost five years, with two-thirds of the components landing in positive territory. Caterpillar topped the list with a 3.3 percent gain, followed by DuPont, which added 2.3 percent after upping its first-quarter and full-year earnings forecasts. Others reaping sizable gains included GE, which was up 1.9 percent, GM, which gained 1.7 percent and Hewlett-Packard and McDonald's, which each rose 1.5 percent.

Of the nine Dow components to close in negative territory (one closed unchanged), none of the losses exceeded 1 percent. Outside the Dow, Sears Holdings Inc. (the legal name of the Sears-K-Mart merger) rose 12.8 percent due to a fourth-quarter increase in income that more than doubled that of one year ago. The company, however, admitted that it is not without challenges. In addition, several brokerages reported upbeat quarterly results, but it was difficult to impress Wall Street after Goldman Sachs released sky-high numbers on Tuesday.

The Nasdaq crossed the 2300 mark, helped as usual by a variety of sectors. But today a lot of them were in technology. PMC-Sierra rose 6.8 percent on an upgrade, as did SanDisk, which added 5.8 percent. JDS Uniphase continued its winning ways, climbing 8.3 percent, while Sun Microsystems rose 4.1 percent. Oracle and Ericsson gained 2 percent each, while Qualcomm posted a 1-percent increase.

As of 4 p.m. EST:

The Dow Jones industrial index closed up 58.43 points (+0.58 percent) to 11,209.77; the Nasdaq composite gained 15.94 points (+0.69 percent) to 2,311.84, and the Standard & Poor's 500 index gained 5.54 points (+0.43 percent) to 1,303.02.

The 30-year Treasury bond closed down 24/32 in price with the yield rising to 4.75 percent, from 4.71 percent on Tuesday.

The 10-year Treasury note closed down 9/32 in price with the yield rising to 4.72 percent, from 4.70 percent on Tuesday.

The five-year Treasury note closed down 3/32 in price with the yield rising to 4.69 percent, from 4.68 percent on Tuesday.

The two-year Treasury note closed down 3/32 in price with the yield rising to 4.67 percent, from 4.64 percent on Tuesday.

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 6.128 percent, up from 6.123 percent on Tuesday.

The 15-year conventional fixed-rate mortgage was at 5.738 percent, down from 5.742 percent on Tuesday.

Coming up:

Thursday is big. The February consumer price index, or CPI, will likely wield the most influence, as it checks for inflation at the retail level. The findings will likely influence Treasuries, with low inflation indicators leading to buying. Signs of inflation would have the opposite effect. Analysts are expecting the CPI to rise 0.2 percent and the core rate, which eliminates volatile food and energy prices, would duplicate that number. The January CPI rose 0.7 percent, but the core went up to 0.2 percent.

Housing starts and building permits for February are also due, with starts expected to plummet to an annual rate of 2.04 million units from the previous 2.28 million. Building permits are predicted to slide from January totals, coming in at an annual rate of 2.1 million versus 2.22 million. Also on tap, first-time unemployment claims for the week ended March 11. Claims are expected to come in at 290,000, which would be a considerable drop from the 303,000 posted the previous week.

Later in the morning the Philadelphia Fed index of March manufacturing conditions is due, and it is expected to hit 11.8, which would be lower than the February index of 15.4. Any number above zero indicates expansion in the sector, but a decline of that magnitude could have a positive impact on Treasuries.

Overnight and into Thursday mortgage rates are likely to hold fairly steady due to the relative stability in today's Treasury yields.

Carolyn Siegel

Carolyn@interest.com

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