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| CNN's Ali Velshi says the holiday season economic forecast, pressed by rising energy and food prices, looks gloomy. (October 17) |
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NEW YORK (CNN/Money) -
Bonds rallied Friday, taking yields to week-long lows, as a sea of Fed voices, downbeat earnings forecasts and falling oil prices have seemingly soothed market jitters over inflation.
Meanwhile, the dollar rose against the euro and the yen.
The benchmark 10-year note rose 13/32 98-30/32 to yield 4.38 percent, down from 4.44 late Thursday. The 30-year bond jumped 28/32 of a point to 111-14/32 to yield 4.60 percent, down from 4.67 the previous session. Bond prices and yields move in opposite directions.
In shorter-dated debt, the five-year note gained 6/32 to yield 4.25 percent, and the two-year note added one tick to yield 4.20 percent.
Fed officials have spent the last few weeks vowing that the central bank would come out in front of inflation and stop it before it marred the economy.
Inflation, which erodes the value-of fixed-income investments, often hits longer-dated debt the hardest because yields rise higher on long bonds to account for additional risk incurred by investors.
Little surprise then that for the last two months Treasuries have sold off as inflation fears were whipped up by evidence that the economy was rapidly bouncing back from hurricane-related weakness and that high energy costs were pushing prices higher.
But then several Fed voices reassured markets that they were not merely chasing inflation via higher rate hikes, but stopping it before it began. This perception has slowly taken prices on the 10- and 30-year notes higher all week despite a series of reports showing manufacturing rebounds and rising producer prices.
Friday's sharp decline in oil prices also supported the bond market, as higher energy costs have been largely responsible for inflation readings that have haunted traders for the last few months.
Moreover, investors have chosen to focus on this quarter's spate of corporate profit warnings, rather than upbeat current earnings, worried that corporate America is pointing to the economic growth slowdown that analysts have been debating ever since oil prices spiked above $55 in October 2004.
The bond market will look to next week's readings on consumer confidence, durable goods and gross domestic product with interest to gauge how serious current inflationary pressures are and whether the fed will be able to contain them.
In currency trading, the dollar gained against the euro and the yen. The euro bought  1.1954, down slightly from $1.2011 late Thursday, and the dollar bought ¥115.90, up from ¥115.38.
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