NEW YORK (CNNMoney.com) - Bond prices fell Thursday as investors backed out of their safe-haven investment and instead tried to capitalize on a stock market rally, while a regional manufacturing report played into inflation worries.

The dollar weakened against the euro and the yen.

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The 10-year note slipped 7/32 to 100-06/32, yielding 5.10 percent, up from 5.06 percent late Wednesday. The benchmark yield continued to remain below the yield on the two-year note, resulting in an inverted yield curve.

Yield curve inversions in the past have been considered possible signs of impending recessions, but that is considered less reliable since the curve has inverted on and off over the past 11 months. Many economists now say an inversion is more a harbinger of slowing economic growth.

The 30-year bond lost 15/32 to 90-11/32, to yield 5.13 percent, up from 5.10 percent the previous session. Bond prices and yields move in opposite directions.

The five-year note declined 4/32, yielding 5.07 percent, while the two-year note slipped one tick, yielding 5.14 percent.

Bond prices extended their losses as the Dow industrials peaked above the 11,000 mark during late afternoon trading.

Stocks rallied after Federal Reserve Chairman Ben Bernanke said that overall cost increases due to higher energy prices were "relatively low" and that inflation expectations in the Treasury market had eased somewhat over the past month.

Treasurys had slipped earlier in the session after a report revealed manufacturing activity in New York State rose unexpectedly to 29.01 in June as gauged by the "Empire State" index of general factory conditions, up from a revised 12.94 in May.

But of more concern was the prices-paid component of the index, which rose steeply, suggesting rising inflation pressures. (Full story.)

Bonds investors hate inflation because it erodes the value of their fixed-interest-paying investments.

A weekly report on jobless claims also caught economists off guard. The number of U.S. workers claiming an initial week of jobless claims unexpectedly fell to a nearly four-month low of 295,000. Economists surveyed by Briefing.com had expected the number to rise to 320,000. (Full story.)

The jobless report pointed to strength in the labor market. Some economists worry that a tight employment market will pressure wages and raise inflation.

Treasury prices sank Wednesday after a report on consumer prices cemented expectations that the Federal Reserve will hike rates when it meets June 28-29 and possibly keep raising rates in the months ahead.

In other economic news, investors also took in a report on industrial production that showed output at U.S. factories, mines and utilities unexpectedly fell 0.1 percent in May. Wall Street economists polled by Briefing.com were expecting industrial production growth to post a 0.2 percent rise. (Full story.)

In currency trading, the euro bought $1.2613, up from $1.2593 late Wednesday. The dollar traded at ¥114.92, down from ¥115.06 the previous session.

--from staff and wire reports

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Related: New fear: A Fed gone too far.