NEW YORK (CNN/Money) -
Bond prices rallied on Friday as the latest trade and consumer data cast doubt on conventional wisdom that the U.S. economy is poised for stronger growth ahead.
As oil prices soared to new highs and stocks hit fresh lows for the year, the combined effect was to increase flows into government debt, lifting the benchmark 10-year note 14/32 higher to 100-7/32 for a yield of 4.22 percent, down from 4.27 percent late Thursday.
The 30-year note gained 16/32 of a point to 105-7/32 to yield 5.02 percent, down from 5.05 late yesterday. Prices and yields move in opposite directions.
The two-year note added 3/32 of a point to 100-18/32 to yield 2.45 percent, and the five-year note climbed 10/32 of a point to 100-12/32 to yield 3.42 percent.
Investors have begun to doubt the Federal Reserve's theory that recent economic weakness was simply a soft patch. Bond bulls were hoping continued softness in the data and ever-costlier fuel might force the central bank to moderate the pace of monetary tightening.
"If crude oil prices keep on rising, the chances that consumption is going to be hurt further down the line rises," Peter Kretzmer, senior economist at Banc of America Securities, told Reuters. "That means the Fed could be more gradual in raising rates."
Interest-rate futures were still showing a better-than-even chance the Fed will hike rates at its next meeting in September, an echo of the central bank's optimism about the economy at its last policy meeting.
U.S. living beyond its means
Bonds got an early lift on news that July producer prices were subdued and that the June trade gap was so large that second-quarter GDP could be lower than first reported.
The PPI rose 0.1 percent in July, as did the core index excluding energy and food, a favorable result for inflation-obsessed fixed-income investors.
"The PPI number had some pipeline pressure underneath the surface, but the market liked the fact that the core rate was up only 0.1 percent," Cary Leahey, senior U.S. economist at Deutsche Bank Securities in New York, told Reuters.
Even better for bonds, the June trade deficit ballooned to $55.82 billion, way above expectations while the real deficit, adjusted for inflation, hit $59 billion.
Analysts said the record trade gap in June would knock down estimates of second-quarter gross domestic product (GDP) growth to less than 3 percent.
"The overall weaker GDP number coming from the trade data does give you a more bullish feeling on Treasuries," said Banc of America's Kretzmer.
With oil prices leaping to new highs well above $46 a barrel on Friday, concerns about energy costs conspired with a shoddy job market to dampen consumers' moods -- all to the benefit of Treasuries.
The University of Michigan index of consumer confidence fell to 94.0 in August when analysts had looked for a rise to 97.5 from 96.7 in July.
The dollar fell sharply on the trade deficit report as the latest data cast fresh doubts on the U.S. economy's recovery and its ability to draw foreign capital to fund the growing gap.
At around 3:30 p.m. ET, the euro was up 1 percent at $1.2372 after trading in negative territory at the start of U.S. trade. The dollar was quoted at ¥110.70 against the Japanese currency, down from ¥110.86 on Thursday.
-- from staff and wire reports
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