NEW YORK (CNN/Money) - Treasury prices posted solid gains Friday as investors bet that the Federal Reserve would not only lower interest rates further but also keep them near rock bottom for some time to come.

The U.S. dollar, meanwhile, weakened sharply after a gauge of consumer sentiment fell unexpectedly in June.

Shortly after 4:00 p.m. ET, the benchmark 10-year note added 15/32 of a point in price to trade at 104-11/32, dragging the yield down to 3.11 percent from 3.16 percent Thursday. The 30-year bond added 10/32 of a point in price to 119-6/32, yielding 4.19 percent from 4.22 percent late Thursday.

After a slow start early Friday, shorter-term instruments also gained ground. The two-year note was up 2/32 at 100-11/32, yielding 1.08 percent, while the five-year note rose 6/32 of a point to 102-25/32, yielding 2.03 percent.

In the currency market, the dollar bought ¥117.46, down from ¥117.62 late Thursday. The euro bought $1.1865, up from 1.1762 late Thursday.

Flagging consumer confidence, which took a turn for the worse in early June after a spurt of improvement that followed the end of the war in Iraq, gave traders an extra reason to buy bonds.

The University of Michigan consumer sentiment index dived to 87.2 in June from 92.1 in May, confounding analysts who had looked for a rise to 93.4. Much of the damage came in expectations, which sagged 7.2 points to 84.2 -- a potential sign that respondents were worried about a grim jobs outlook.

The results knocked equities lower and stoked speculation the Federal Reserve might cut interest rates by a half-percentage point rather than the quarter-percentage point many had expected.

Still, dealers are becoming more cautious about the spectacular rally in prices of Treasurys as yields collapse to historic lows on an almost daily basis. Some cautioned that the market may be getting ahead of itself.

"The party's going to stop sometime, and it's going to be hard to get off," said Andrew Brenner, head of fixed income at Investec Ernst & Co.

Data out earlier in the day revealed scant price pressures in the economy. U.S. producer prices fell 0.3 percent in May, slightly more than the forecast 0.2 percent dip. Stripping out food and energy, prices rose a tiny 0.1 percent as expected, while year-on-year they fell 0.1 percent.

Falling energy prices also played a part in a narrowing of the U.S. trade deficit to $42.03 billion in April from $42.87 billion the month before. Imports fell 2.1 percent, largely due to lower oil prices, but exports also dropped 2.2 percent.

"The Fed is using the deflation fear to drive the whole yield curve lower in the hope of reviving the economy," noted Ifty Islam, head of fixed income strategy at Deutsche Bank Securities.

Supporting longer-term Treasurys was a second buyback from Freddie Mac. The giant home loan firm bought almost $10.0 billion of agency debt over the past two days and traders said sellers were switching much of the freed cash into Treasuries.

Freddie Mac (FRE: Research, Estimates), the nation's second largest mortgage lender, is facing a Securities and Exchange Commission investigation for possible accounting irregularities.  

-- from staff and wire reports