NEW YORK (CNNfn) - Bonds moved higher at mid-morning Friday as investors fled a plunging stock market for the relative safety of government securities.
But the dollar, already under pressure following a speech by Fed Chairman Alan Greenspan, fell further after a government report suggested inflation is rising at a greater-than-expected rate.
Just before 10:30 a.m. ET, the price of the benchmark 30-year Treasury bond rose 13/32 to 97-24. Its yield, which moves inversely to the price, fell to 6.29 percent from Thursday's 6.32 percent, which was a two-year high.
The bond's gains came immediately after the opening of U.S. equity markets, which fell dramatically -- hit by a combination of a spike in wholesale inflation and a warning from Greenspan about the risk of a major equity sell-off.
For the first time this week, the stock price decline brought investors into bonds.
"It's getting close to the breaking point with the Dow," said Tony Crescenzi, bond strategist at Miller Tabak & Co. "If we get down toward the 10,000 point, (bonds) will gain more."
Just before 10:30 a.m. ET, the Dow Jones industrial average stood at 10,111.21, 176 points, or 1.71 percent, lower.
The stock sell-off followed news from the Labor Department that the Producer Price Index rose 1.1 percent in September, well above expectations. More importantly, the core figure -- which excludes food and energy -- climbed a greater-than-expected 0.8 percent.
Bond prices initially fell after the data, the latest in a batch of news suggesting rising inflation, which erodes the value of a bond's fixed income payments.
"This does imply we'll see higher CPI inflation," Kathleen Camilli, chief economist at Tucker Anthony, said of next Tuesday's September Consumer Price Index. "The bond yield will move up as long we continue to see greater-than-expected data."
Stocks were jolted in part by Greenspan, who in comments at a banking conference Thursday warned of what he saw as a potential bubble in U.S. asset prices.
"At a minimum, risk managers need to stress test the assumptions underlying their models and set aside somewhat higher contingency resources - reserves or capital -- to cover the losses,'' Greenspan said.
While Greenspan has warned of stock risks before, most famously in his "irrational exuberance" speech of 1996, Charles Reinhard, chief market strategist at ABN AMRO, said this time things are different.
"This is very different, because the equity market is actually about 28 percent overvalued compared to our models right now," Reinhard said.
Ahead, Greenspan speaks again at noon ET at a White House Congressional briefing.
Separately, the Federal Reserve said industrial production fell 0.3 percent in September. Industrial capacity, meanwhile, dropped to 80.3 percent in September from 80.7 percent during August. The report had no apparent market effect.
Dollar weaker
The dollar, already hard-hit by Greenspan's comments, continued to fall after the strong PPI report.
Just before 10:30 a.m. ET, the dollar slipped to 105.44 yen from 107.82 Thursday, a 1.84 percent drop in the dollar's value.
It cost $1.0879 to buy a euro, up from $1.0777 Thursday, a 1.01 percent fall in the dollar's value.
Both the Greenspan comments and the strong PPI are bad for the dollar as investors, wary about stock market weakness, move out of dollar-denominated securities. 
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