NEW YORK (CNNMoney.com) - Treasury prices surged Friday on tame inflation and weaker-than-expected retail sales reports, leading investors to believe that the Federal Reserve's monetary tightening campaign is winding down.

The benchmark 10-year note rose 13/32 to 101-03/32, yielding 4.35 percent, down from 4.42 late Thursday. The 30-year bond added 27/32 to 112-16/32 to yield 4.53 percent, down from 4.61 the previous session. Bond prices and yields move in opposite directions.

The details See more

The two-year note gained two ticks, yielding 4.34 percent, while the five-year note was up 7/32, yielding 4.29 percent.

Bond markets closed at 2 p.m. in advance of Monday's Martin Luther King Jr. holiday. Market will be closed on Monday.

After slumping earlier this week, bonds rallied following a Labor Department report Friday that producer prices rose 0.9 percent in December, more than twice the 0.4 percent expected by economists surveyed by Briefing.com.

While the overall Producer Price Index climbed, the so-called core PPI, which excludes volatile food and energy costs, only increased 0.1 percent. The slight gain in the core reading suggests underlying inflation remains fairly tame.

"The bond market liked the inflation data. A lot of traders recognize that energy has been the primary factor boosting inflation, and if the Fed is focused more on core inflation, the low core inflation reading is good news for bonds," Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis, told Reuters.

Treasury investors fear inflation since it erodes the value of the fixed interest-paying investments.

Also Friday, the Commerce Department said retail sales rose 0.7 percent in December, falling short of economists' expectations, who had predicted a 1 percent increase according to Briefing.com. Excluding auto purchases, retail sales rose just 0.2 percent, the government report said.

"I would put more attention to (ex-autos data) because it has confirmed that consumers are definitely feeling the pinch from higher energy prices," David Sloan, an economist at 4CAST Ltd. in New York told the news service.

Retail sales are widely followed since they are a broad indicator of consumer spending, which fuels two-thirds of the nation's economy.

Friday's data appeared to bolster investor expectations that the central bank is bringing its interest rate hike campaign to an end, which began in June 2004.

Right now, investors are betting the Federal Reserve will raise rates at its January meeting, but a rate hike in March seemed less likely as interest rate futures for another increase fell to 56 percent on Friday.

Looking ahead to next week, investors will be closely watching Consumer Price Index figures and the Federal Reserve's "Beige Book" summary of economic conditions both of which are due out Wednesday.

In currency trading, the dollar fell against the euro and edged lower against yen.

The euro bought $1.2136, up from $1.2017 late Thursday in New York. The dollar bought ¥114.26, down slightly from ¥114.30 the previous session.

--from staff and wire reports

_____________

For updated bond charts, click here.

For all of the latest market news, click here.