Bonds rise as inflation eases
Investors also worry about continued economic sluggishness.
NEW YORK (CNNMoney.com) -- Treasury prices rose Wednesday as investors saw signs of lessening inflation and continued economic slowdown.
The benchmark 10-year note rose 9/32 to 102 14/32 and its yield fell to 3.7% from 3.73% late Tuesday. Bond prices and yields move in opposite directions.
The 30-year bond climbed 18/32 to 102 29/32 with its yield falling to 4.32% from 4.43%.
The 2-year note edged higher, lowering its yield to 2.25% from 2.26%.
Lower inflation: Bond investors took a better-than-expected report on U.S. factory orders as a sign that inflation pressures were being eased by lower oil prices, according to Steve Van Order, chief fixed-income strategist at Calvert Funds.
Factory orders rose by 1.3% in July, according to the report, driven by a rise in exports. Economists polled by Briefing.com expected an increase of 1%.
Orders for non-durable goods, which often respond closely to the price of petroleum-based fuels, rose 1.2%, according to the report.
The price of crude oil began falling in mid-July on fears that high prices had begun to cut into demand. By Wednesday, oil prices had dipped below $109 a barrel, which investors believed eased pressure on businesses to raise prices .
Falling crude prices also bolstered the dollar slightly against the 15-nation euro as the report was released. As pressure from inflation eases, fixed-income government bonds are worth more.
"I think you're seeing the inflation premium that has been in Treasury bond yields is being taken out," said Chris Currer, director of fixed income trading at BMO Capital Markets in Chicago.
Slower economy: But bond investors still worried that a reduction in oil demand, along with Tuesday's reports that manufacturing and construction businesses were slowing, signaled a longer recovery time for the U.S. economy.
Investors were also concerned that the strength U.S. exports that led to the increase in July factory orders would fade as foreign economies begin to falter.
"Overall the data lately has tended to be a little weaker than expected," said Van Order.
The Federal Reserve also issued its view on the economy Wednesday, saying that activity around the country remained slow, and that sluggishness could continue into 2009.
Investors often purchase government-backed debt as a safe haven against economic slowdowns.
Economic sluggishness was evident in the stock market Wednesday, with the major indexes down at midsession.
Bond investors hoped to get a further read on the state of the U.S. economy from a report on employment scheduled for release Friday. Economists expect to see a decline in jobs for the eighth straight month.
Asian buying: Asian banks have been driven toward U.S. Treasurys as the slowing economy reduced the appeal of debt issued by embattled mortgage finance companies Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), according to Michael Cheah, bond fund manager at AIG SunAmerica.
China's four largest banks have shifted away from debt backed by the two companies, in case of a government bailout, according to a Wall Street Journal article.
"It's a better safe than sorry sort of investment," said BMO's Currer. 
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