NEW YORK (CNN/Money) - Government bond prices jumped Wednesday as stocks tumbled, sending the yield on the bellwether 10-year note below 4 percent for the first time since April.

The dollar gained on the euro and yen.

The benchmark 10-year Treasury jumped half a point to 102-5/32 to yield 3.98 percent, down from 4.04 percent late Tuesday.

The 30-year bond jumped a full point to 108-28/32, yielding 4.78 percent, down from 4.84 percent. Bond prices and yields move in opposite directions.

The two-year note remained flat at 99-26/32 to yield 2.47 percent and the five-year note gained 6/32 to 100-20/32 to yield 3.24 percent.

Federal Reserve policy-makers lifted a key overnight borrowing rate to 1.75 percent Tuesday from 1.5 percent while saying the economic recovery has regained some traction after hitting a soft patch in the summer.

But the central bank's observation that inflation and inflation expectations "have eased in recent months" encouraged Treasury investors.

Bond traders fear inflation as it erodes the value of their fixed-rate investments.

"The Fed sounded optimistic about growth, but its view that the risks of inflation and inflation expectations were reduced is the hallmark buy signal for the back end (of the bond curve)," said Merrill Lynch Government Securities fixed-income strategist James Caron.

"What's happening is that the inflation premium is being taken out of longer-dated securities."

As a consequence, gains are concentrated on longer-dated bonds, Caron said, particularly 10- and 30-year maturities.

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On Wall Street, the Dow industrials slumped 1.3 percent -- its biggest drop in nearly seven weeks -- on worries about corporate earnings, rising oil prices and their effect on the economy.

Crude oil for November delivery jumped $1.59 to $48.35 a barrel on the New York Mercantile Exchange, on worries about falling stockpiles of crude oil and possible heating oil shortages as winter approaches.

Rising oil prices can sometimes stoke inflation, but investors have chosen instead to speculate that higher energy prices may slow economic growth, especially in light of the Fed's inflation outlook.

In the currency market, the euro fell almost a penny to $1.2265 after Tuesday's rally when it closed at 1.2345. The dollar rose to ¥110.55.