Bonds rise on stronger dollar
Investors see easing inflation as energy prices fall in the wake of Hurricane Gustav.
NEW YORK (CNNMoney.com) -- Bonds rose Tuesday as inflationary concerns eased on the back of a strengthening U.S. dollar.
Two economic reports showing weakness in U.S. manufacturing and construction activity also drove investors to government bonds, viewed as safe havens in times of economic unrest.
The benchmark 10-year note rose 14/32 to 101 21/32 and its yield fell to 3.79% from 3.85% late Friday. Bond prices and yields move in opposite directions.
The U.S. markets were closed Monday in observance of the Labor Day holiday.
The 30-year long bond climbed 18/32 to 101 18/32 with its yield falling to 4.4% from 4.43%.
The 2-year note rose 4/32 to 100 3/32 with its yield down to 2.32% from 2.39%.
Inflation worries ease: The value of the dollar rose against major currencies Tuesday, as oil prices continued to decline -- a trend that has been largely in place over the past six weeks.
Crude oil fell below $109 a barrel Tuesday after Hurricane Gustav failed to cause significant damage to oil and natural gas facilities in the Gulf of Mexico.
Falling energy prices have led to "more moderate inflation readings," said Michael Strauss, chief economist at Commonfund, an investment house for non-profits.
Oil prices have trended downward since hitting a high of $147.27 in mid-July, easing pressure on businesses.
Investors have also been seeing greater weakness in the economies of Europe compared to the United States. On Tuesday, The Organization for Economic Cooperation and Development lowered its forecast for economic growth in the major European economies and Japan and raised its expectations for the U.S.
As pressure from inflation eases, fixed-income government bonds are worth more.
Manufacturing and construction: U.S. manufacturing businesses as a whole declined in August, driving investors toward the safety of government bonds.
The report from the Institute for Supply Management, which takes into account measurements such as production levels, customer orders, and inventories, said its main measurement fell slightly to 49.9% last month, from 50% in July. A reading below 50% usually indicates contraction.
The report also showed a decline in overhead paid by manufacturing businesses, according to the ISM report, suggesting that price inflation may be peaking.
Construction businesses also showed weakness, according to a separate report from the Commerce Department. Spending on construction projects fell by 0.6% in July, the government said, down from a growth of 0.3% a month earlier. Economists polled by Briefing.com had expected construction spending to fall by only 0.4%.
Trading was light on the day after the three-day Labor Day weekend, so the market was slightly more volatile than usual, said Andrew Brenner, senior vice president at brokerage MF Global.
"It is still a holiday-type environment, and the markets are still relatively thin," he said.
Stocks: The manufacturing and construction reports pulled stocks off their highs. The Dow Jones Index had been driven higher as oil prices fell, however the stock market pulled back slightly after the manufacturing and construction reports were released. 
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