Bonds slip as stagflation threat looms
Holders are caught between falling stock prices and rising oil prices.
NEW YORK (CNNMoney.com) -- Bonds were mostly lower Wednesday, as renewed credit concerns soured investors' appetite for stocks but fears of rising inflation grounded the flight to quality.
The benchmark 10-year note fell 9/32 to 100 17/32, lifting its yield to 4% from 3.91% late Tuesday. Bond prices and yields move in opposite directions.
The 30-year bond was down 14/32 to 98 30/32. Its yield rose to 4.56% from 4.54% late Tuesday.
The 2-year note fell 3/32 to 100 17/32, and yielded 2.48%.
Stocks fell as investors remained worried about the health of the financial services sector. It was the second straight day of losses; on Tuesday, JPMorgan Chase (JPM, Fortune 500) and a slew of financial companies warned about the ongoing impact of credit market problems.
The Dow Jones industrial average was down 1.3% at midday. The blue-chip average was led lower by major financial companies, such as AIG (AIG, Fortune 500), Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and American Express (AXP, Fortune 500). (Full story.)
Weakness in the stock market is "supposed to be good for bonds," said Michael Cheah, bond fund manager at AIG SunAmerica. But that weakness has been "offset by the sharp rise in the price of oil."
Oil prices rose about $4 a barrel during Wednesday's session, after the government reported a surprisingly steep decline in the nation's petroleum inventories. (Full story.)
Bondholders worry that rising oil and gasoline prices will lead to higher inflation, which erodes the value of fixed-income investments like government-backed bonds.
"In a word, it's stagflation," Cheah said. The combination of economic weakness, as evidenced by falling stock prices, and rising inflation, which is a byproduct of higher oil prices.
"The bond market doesn't know what to make of this," Cheah added. 
