Prices of US Treasuries rose on Friday as supportive comments from a Fed official and surprise declines in industrial output and consumer confidence helped offset fears of an imminent interest rate hike.
Richmond Federal Reserve President Alfred Broaddus suggested the central bank was "some distance" from raising rates despite an unexpected surge in March consumer prices.
"We must wait a little longer before we make judgments on whether or not the reports of the March economic data will persist," Broaddus said at an event sponsored by Salisbury University in Cambridge, Md.
Broaddus was the third policymaker this week to air such a view, bringing some comfort to a market that had sold off sharply on worries that rates could rise as early as August.
Fed fund futures, a proxy for market thinking on monetary policy, trimmed the chances of a rate rise this summer after Broaddus's comments.
The soothing words from Fed officials were complemented by the first respite from positive economic data in a long while.
Both the University of Michigan's consumer sentiment gauge and the government's tally of industrial production fell short of forecasts.
That helped bonds regain the upper hand after five straight sessions of losses, allowing 10-year notes to climb 14/32 in price, pushing yields down to 4.34 percent from 4.40 percent on Thursday.
Despite the rally, yields remain above last Friday's 4.19 percent and far away from last month's low of 3.65 percent.
Five-year notes added 11/32 to yield 3.37 percent from 3.45 percent. Two-year notes gained 2/32, leaving their yield at 2.03 percent from 2.07 percent.
Thirty-year bonds rose 18/32, lowering yields to 5.17 percent from 5.21 percent.
The gains began after news that industrial output fell 0.2 percent when analysts had looked for a 0.3 percent gain, with most of the weakness in utilities. Production for the quarter was up a robust 6.6 percent, the best result since 2000.
Bond bulls were pleased capacity utilisation edged down to 76.5 percent in March from 76.7 percent in February, leaving it well below the 81 percent average of the previous three decades.
This gap has helped keep inflation low and is a major reason why the Fed says it can be patient on raising rates.
Surprising softness in the University of Michigan survey of consumers also nudged the market higher. Its main index of confidence slipped to 93.2 in April from 95.8 in March, confounding analysts who had expected an improvement to 96.5.
Earlier, the market was briefly troubled by upbeat US housing data. Starts jumped 6.4 percent in March, taking the annual rate to 2.007 million, well above expectations.
While the Fed is content to wait for slack in the economy to be taken up, some investors worry that a string of upside surprises in recent data mean it is dicing with inflation.
"Most market participants believe that Fed officials are behind the curve, thinking that inflation will overshoot," said Bill Dudley, chief economist at Goldman Sachs. "Fed officials are likely to be much more sanguine."
The Fed cannot completely ignore the market, he said, in part because a sustained rise in inflationary expectations could lead to the very inflation the market fears.
"If this brought the Fed's credibility truly into question, the market could force the FOMC's hand, even if Fed officials were to prefer to stand pat," said Dudley, though he still believes rates will not rise until 2005.
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