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A major sell-off in U.S. Treasury securities on Thursday sent prices plunging and yields, which move in the opposite direction of prices, soaring. The yield on the benchmark 10-year note closed at 4.64 percent -- its highest level since June 2004. Mortgage rates, which are based on Treasury yields, are already beginning to climb - the first real move in about two weeks. The culprit in this scenario: the European Central Bank, or ECB.

Earlier today, the ECB raised interest rates to 2.5 percent, its highest level in three years, in order to contain inflation. This parallels the Fed's rate hikes over the past 21 months. In addition, the ECB president touted economic strength in the euro zone. Not only could this draw money out of U.S. Treasuries, but it might influence the Fed to keep raising short-term interest rates in order to compete for investment funds. This, of course, spooked bond traders who sold aggressively.

Also weighing on bonds, but to a lesser extent, were unemployment claims for the week ended Feb. 24. First-time claims rose by 15,000 to 294,000 from a revised 279,000 the previous week - making this the longest stretch of weeks with claims below 300,000 in five years. Although claims were higher than expected, it was noted that Lincoln's birthday and President Day, not celebrated uniformly, might have added to volatility. The closely watched four-week average came in at 287,250, while benefits paid to those out of work for more than a week fell to 2.49 million - its lowest level since February 2001. Underlying strength in the labor market is troublesome to bond traders, as it could signal future inflation due to upward pressure on wages.

Stocks in a rut

The equity markets have been in a rut, posting gains one day and giving them back the next. So it follows that since Wednesday was a good day, today would not be so good. It happened, but losses were slim. Retail was in focus, with chain stores reporting same-store sales for February. Almost 60 percent of them came in below estimates. Wall Street kept one eye on rising Treasury yields and the other on oil prices, which soared $1.43 to $63.40 a barrel.

On the retail side, department stores and discounters like Wal-Mart did all right. But apparel retailers were hit hard. Stores such as Aeropostale, Gap, and Chico's FAS posted losses of 5.4 percent, 11 percent and 14 percent, respectively. And Abercrombie & Fitch slid 9.2 percent. Some attributed inclement weather as part of the problem.

The Dow Jones industrials were split fairly evenly between winners and losers, but there were not many big numbers on either side of the flat line. Of those that closed in positive territory, only Alcoa and DuPont added more than 1 percent. GM again assumed position as the biggest loser with a 2.5-percent decline, while Intel shed earlier gains to end with a 1.5-percent loss. Citigroup was the only other component to drop more than 1 percent.

Google helped the Nasdaq with a 4-percent gain after its CEO said the search engine giant is working toward being a global $100 billion company. Yahoo! lost 1.5 percent. Chips continued yesterday's rally in the early going, but turned negative. This sent the Philadelphia semiconductor index down 0.7 percent.

The technology bellwethers didn't fare well today - except for JDS Uniphase, which rose 10.1 percent. Dell added close to 1 percent, and Ericsson was up 0.7 percent, but many of the big-cap techs were fairly flat on the day.

As of 4 p.m., EST:

The Dow Jones industrial index closed down 28.02 points (-0.25 percent) to 11,025.51; the Nasdaq composite lost 3.53 points (-0.15 percent) to 2,311.11, and the Standard & Poor's 500 index fell 2.10 points (-0.16 percent) to 1, 289.14.

The 30-year Treasury bond closed down 28/32 in price with the yield rising to 4.61 percent, from 4.55 percent on Wednesday.

The 10-year Treasury note closed down 13/32 in price with the yield rising to 4.63 percent, from 4.58 percent on Wednesday.

The five-year Treasury note closed down 6/32 price with the yield rising to 4.67 percent, from 4.62 percent on Wednesday.

The two-year Treasury note closed down 1/32 in price with the yield rising to 4.71 percent, from 4.70 percent on Wednesday.

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

The 30-year conventional fixed-rate mortgage at 6.021 percent, up from 5.973 percent on Wednesday.

The 15-year conventional fixed-rate mortgage at 5.635 percent, up from 5.585 percent on Wednesday.

Coming up:

The week ends with Friday reports on consumer sentiment and the service sector. The University of Michigan will offer its final reading on consumer sentiment for February and it will likely draw interest, especially in light of the disappointing consumer confidence report that came out Tuesday. Analysts are expecting a reading of 87.5, which would be a tad higher than the preliminary report of 87.4, released two weeks ago.

The Institute of Supply Management, or ISM, index on February conditions in the service sector is also due. Even though this sector employs about 80 percent of the workforce, its impact pales when compared to the ISM index on manufacturing. The index on the nonmanufacturing sector is forecast to rise to 58.5 from the January reading of 56.8.

What is missing tomorrow is the employment report for February, which generally is released on the first Friday of the following month. This month, however, this weighty report has been pushed forward to a March 10 release date.

The huge increase in Treasury yields has begun to take effect. Mortgage lenders are moving rates up and that trend can be expected to continue overnight and into Friday.

Carolyn Siegel

Carolyn@interest.com

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