NEW YORK (CNN/Money) - Bonds surged and the dollar fell Wednesday after an inflation report led investors to believe the Federal Reserve will not speed up its rate-hiking campaign, and a top bond fund manager forecast low Treasury yields for some time.

The benchmark 10-year note rose 12/32 of a point to 100-14/32 to yield 4.07 percent, down from 4.12 late Tuesday.

Meanwhile, the 30-year bond jumped 24/32 of a point to 114-13/32 to yield 4.43 percent, down from 4.47 in the previous session. Bond prices and yields move in opposite directions.

Prices for the five-year note added 6/32 of a point to 100-15/32, yielding 3.77 percent, and the two-year note edged higher 2/32 of a point to 100-4/32, yielding 3.56 percent.

The yield for the benchmark 10-year note fell to a three-month low of 4.06 percent early in the session after the government released a report that eased inflation worries.

The Consumer Price Index, which measures the price level of a fixed basket of goods and services, rose 0.5 percent in April, according to the Department of Labor. Analysts surveyed by Briefing.com had expected a rise of 0.4 percent.

But "core" CPI, which strips out often-volatile food and energy costs, remained unchanged for April. Analysts had expected the inflation benchmark to edge higher 0.2 percent.

The key inflation read decreases the likelihood of more aggressive interest rate hikes from the Fed, analysts said.

"The key thing is that, while this doesn't take away inflation concerns, it mitigates some of them and makes the 'measured' approach ... an even more likely response from the Federal Reserve," Nick Bennenbroek, senior G10 strategist at Brown Brothers Harriman in New York, told Reuters.

Bonds react strongly to signs of inflation because higher inflation erodes the value of the fixed-interest paying investment.

Treasuries also got a lift after the manager of the world's biggest bond fund said global economic forces are likely to keep inflation in check and support long-term bond yields at or near their current low levels for several years.

Bill Gross, who manages the PIMCO bond fund, said on his Web site: "In combination with a globalized free trade-based economy exhibiting a surfeit of cheap Asian labor, it will be difficult to generate U.S. inflation higher than our current 3 percent even if interest rates fall further."

Gross expects the yield on the 10-year benchmark Treasury to range from 3 to 4.5 percent for the next three to five years.

Bonds were unfazed by a pair of reports related to leadership at the Fed, the nation's central bank.

The Bush administration is considering asking Fed Chairman Alan Greenspan to extend his term beyond Jan. 31 while the White House searches for a successor, the Washington Post reported.

Any delay in naming Greenspan's successor could add uncertainty about the direction of central bank policy and roil markets, the report said.

Separately, the Fed said Wednesday that Governor Edward Gramlich will leave his position Aug. 31 to pursue teaching and research interests. Gramlich's departure creates an opening on the influential panel that sets interest rates.

Looking forward, the government is due to report weekly jobless claims Thursday while a private group is set to release the leading economic indicators for April.

In currency trading, the dollar fell against the euro and yen as the market trimmed expectations that the Fed will increase the speed of its monetary tightening.

The euro bought $1.2680, up from $1.2604 late Tuesday, while the dollar bought ¥106.82, down from ¥107.50 the previous session.

Rising interest rates generally help the dollar as they make dollar-denominated securities more attractive to foreign investors.

-- from staff and wire reports

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