Bonds rally on jump in subprime defaults

NEW YORK (CNNMoney.com) -- Treasury prices broke out of their recent slump Friday, heading higher on concern that the default risk was increasing in the subprime market.

The dollar slipped against the euro and the yen.

The details See more

The benchmark 10-year note gained 13/32, or $4.06 for every $1,000 invested, to yield 4.68 percent, down from 4.73 late Thursday.

The 30-year bond gained 25/32, or $7.81 on a $1,000 bond, to yield 4.78 percent, down from 4.83 in the previous session. Bond prices and yields move in opposite directions.

The five-year note rose 8/32 to yield 4.67 percent, while the two-year note gained three ticks, yielding 4.82 percent.

In a session with no major economic reports on tap, investors looked to European debt markets in early trading, which were lifted by a weaker-than-expected business sentiment reading out of Germany.

"The German IFO was slightly weaker than expectations and produced a positive response in the Bund market, carrying Treasurys with it," John Spinello, chief fixed-income technical strategist at Jefferies and Co., told Reuters.

Bond prices fell in the previous two sessions following a larger-than-expected inflationary reading on consumer prices and on worries that the Fed would not cut interest rates any time soon.

Market strategists noted new stories shake-ups in the subprime market - trickier, riskier mortgage deals gone awry with the housing downturn - seemed to be creeping up in national newspapers every day, with troubling implications for major banks like HSBC.

Also making the headlines was a continued exchange of verbal jabs between top White House officials and Tehran, which was making investors anxious about the possibility that the war in Iraq might spread to neighboring Iran.

"There is a lot of nervousness around Iran and that things there could heat up," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.

Dealers cited an interview of Vice President Dick Cheney in an Australian newspaper as rattling nerves as Cheney seemed to back Senator John McCain's hawkish stance on Iran's nuclear program.

In currency trading, the euro bought $1.3162, up from 1.3124 late Thursday. The dollar bought ¥121.03, down from ¥121.58 in the previous session.

--from staff and wire reports

Fed uncertain inflation drop for real