NEW YORK (CNN/Money) - Bonds rallied Friday on a government report that inflation was tame at the retail level, while the dollar dipped on a weaker-than-expected consumer sentiment report.

At about 4:30 PM ET, the benchmark 10-year bond rose 18/32 to 93-26/32 in its first full day of new-issue trading to yield 4.77 percent, down from 4.85 percent late Thursday. The 10-year yield had hit 4.87 percent during Thursday's session, the highest in nearly two years.

The 30-year bond jumped nearly a full point, gaining 31/32 to 98-11/32 to yield 5.49 percent, easing down from 5.55 percent the previous day. Bond prices and yields move in opposite directions.

The five-year note rose 17/32 of a point to 99-26/32 to yield 3.91 percent, and the two-year note rose 7/32 to yield 2.54 percent.

Friday's data reaffirmed expectations that the Federal Reserve will raise short-term interest rates in the near term, but the U.S. consumer price index rose just 0.2 percent in April. Analysts had expected a 0.3 percent gain.

The tame inflation report gave traders an excuse to pick up bonds beat up after an eight-week sell-off -- the market's worst losing streak in a decade.

"The market was very, very oversold," Richard Gilhooly, fixed-income market strategist at BNP Paribas Corp. told Reuters.

Though traders were buying Treasurys, market confidence was still shaky.

Industrial production still jumped 0.8 percent in April, easily beating forecasts of a 0.3 percent gain and showing proof of a strong economic recovery, which could fuel inflation.

"We fear the Fed has pushed too far with its (monetary policy) accommodation and will have to hike in a hurry," Ram Bhagavatula, chief economist at RBS Financial Markets, told Reuters. "If we're right and inflation takes off, then the sky's the limit for yields," he added.

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Bond investors dread inflation, which erodes the value of their investments.

In currency trading, the dollar dropped against the euro and the yen after the University of Michigan consumer sentiment came in at 94.2 in early May, unchanged from April's number and below analyst forecasts of 96.5.

The dollar bought ¥114.24, down from ¥114.50 late Wednesday, while the euro bought $1.1886, up from $1.1819 late Wednesday.

"Michigan was a touch below consensus. The dollar may pull back a little, especially against interest-rate-sensitive currencies," Daniel Katzive, foreign exchange strategist with UBS in Stamford, Connecticut, told Reuters.