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A trio of reports weighed on U.S. Treasury securities on Monday, sending prices down and yields, which move in the opposite direction of prices, back up to two-week highs. Meanwhile, oil prices continue to fall and that put big pressure on Treasuries, as traders believed that high fuel costs would slow the economy. And it now appears that, although horrendous, the damage caused by Hurricane Katrina will not be as extensive as originally feared. This could be interpreted as a lesser blow to the economy than expected -- a negative for bonds. And then there's the Fed meeting. It isn't scheduled until Sept. 20, but there has been a lot of hand-wringing over whether or not the Fed will raise short-term interest rates and what it will say after the announcement.

In addition to the above, there are some key inflation data due out this week that are of concern to traders, as well as the Advance Retail Sales for August. Tuesday's Producer Price Index (PPI) for August, which measures inflation at the wholesale level, will be of major concenr. Signs of higher-than-forecast inflation would likely spur selling in Treasuries, as this erodes the value of fixed-rate assets, such as bonds. Analysts are expecting the PPI to rise 0.7 percent, but core inflation, which excludes volatile food and energy costs, to edge up by a tame 0.1 percent.

These pressures forced Treasury yields, which mortgage lenders use to set rates, up and mortgage rates followed. Rates rose by one-eighth of a point (0.125) on most popular products.

Dow, Nasdaq Eke Out Gains

Just like bond traders, Wall Street denizens appeared wary of making any big moves prior to the upcoming Fed meeting and economic releases. There was, however, some big corporate news. After more than a year of financial wrangling, Siebel Systems, a maker of business software, agreed to a buyout by Oracle, the sector's 800-pound gorilla. Siebel stock shot up 13 percent on the news, and Oracle also landed in positive territory up 1 percent. EBay also shook things up by acquiring Skype Technology, an Internet phone company. And Delta Airlines fell 23 percent after announcing it would file Chapter 11.

The Dow Jones Industrials were almost equally divided between winners and losers. Alcoa and GE each posted 1-percent wins, but Citibank, which earned an upgrade, failed to capitalize. Oil prices slid more than 10 percent on Monday, putting pressure on oil and oil services companies. Exxon, the only such company in the Dow, led in losses, falling 1.1 percent. McDonald's, which posted a big gain Friday, was down 1 percent, and Intel lost 1 percent after disappointing investors last week with a lackluster mid-quarter update.

The Nasdaq got a boost due to the mergers, but it also benefited from good gains by four tech bellwethers. Sun Microsystems had another good session, adding 2.5 percent, while Oracle, Yahoo! and JDS Uniphase gained 1.6 percent, 1.3 percent and 1.2 percent, respectively. Only Intel posted a significant loss among the losers.

At closing:

The Dow 30 Industrial Index rose 4.38 points (+0.04 percent) to 10,682.94; the Nasdaq Composite index added 7.32 points (+0.34 percent) to 2,182.83, but the benchmark Standard & Poor's 500 Index fell 0.92 points (-0.07 percent) to 1,240.56.

The 30-year Treasury bond fell 25/32 with the yield rising to 4.44 percent from 4.39 percent at Friday's close.

The 10-year Treasury note was down 14/32 in price with the yield climbing to 4.17 from 4.12 percent at Friday's close.

The 5-year Treasury note lost 7/32 in price with the yield rising to 3.97 percent from 3.93 percent Friday's close.

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

The 30-year Conventional Fixed-Rate Mortgage was at 5.575 percent versus5.549 percent at Friday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.164 percent from 5.128percent at Friday's close.

Coming Up:

The Producer Price Index for August is set for release on Tuesday along with the July U.S. trade deficit. The trade gap is expected to tick up by only $1 billion to $59.8 billion from $58.8-billion shortfall in June. This report generally influences the currency markets more than stocks or bonds. In addition, two weekly surveys of retail activity for the previous week will be released, but their impact is muted.

Treasuries will likely dance to the tune of the PPI on Tuesday. If it comes in on target, i.e., shows that inflation at the wholesale level is benign, Treasuries may get a boost, but inflationary numbers would likely cause selling that could put upward pressure on mortgage rates.

Carolyn Siegel

carolyn@interst.com

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