US Treasury debt prices rose on Friday as uncertainty ahead of the US presidential election, compounded by the appearance of a new video tape from Osama bin Laden, prompted some last-minute interest in safe-haven bonds.
But overall, a raft of figures ranging from third-quarter economic growth to Chicago-area factory activity published on Friday did little to alter the outlook for monetary policy.
However, some traders found comfort in a speech from Federal Reserve Vice-Chairman Roger Ferguson reiterating the central bank's intention to be gradual in raising interest rates.
"That seemed to suggest you can linger down on the lower end of the 'neutral' spectrum, so that if neutral ranges from 3 percent to 5 percent, we could stay below that for a while," said one trader at a US primary dealer.
Bonds ticked a bit higher after US network TV aired a tape of al Qaeda mastermind Osama bin Laden, promising further attacks and comparing the government of President George W. Bush to that of "corrupt" Arab leaders.
Coupled with a rebound in oil prices to near $52 a barrel, bin Laden's statement helped give the benchmark 10-year note an end-of-the-week boost, lifting it 7/32 in price for a yield of 4.03 percent. That compared with 4.05 percent on Thursday but was higher than a seven-month low of 3.93 percent hit on Monday.
Soaring energy costs have been viewed mostly as a potential drag on consumption rather than a harbinger of inflation, and thus beneficial to Treasuries.
Consumers were still spending freely in the third quarter, the GDP report showed, although analysts worried rising prices at the pump might eventually crimp Americans' penchant for new cars and homes.
"Consumption, at 4.6 percent, was the biggest engine of growth in the third quarter," said Robert Gay, chief strategist at Commerzbank Securities.
"Bonds firmed on this kind of thing because with oil prices up, the concern becomes whether that 4.6 percent number is sustainable, and the answer is 'No' We'll get a much softer number in the fourth quarter," he added.
Higher energy prices had yet to crimp factory activity, it seemed. On the contrary, the Chicago purchasing managers index jumped to 68.5 in October from 61.9 in September, confounding analysts who had looked for a dip to 59.0.
Alan Ruskin, research director at 4CAST, found the strength in the Chicago report hard to explain given that the auto sector was having problems shifting inventory, and noted the survey had been even more volatile than usual this year.
"Still, it tends to suggest the prior slight slowing in manufacturing may have been arrested and reversed," he added.
The factory strength was not enough to keep bonds in the red for too long - by the afternoon, two-year notes were up 2/32 for a yield of 2.56 percent, having fetched 2.59 percent in a poorly received $24 billion auction on Wednesday.
The inflation measures in the GDP report were favourable for bonds, with the overall deflator more than halving to 1.3 percent. The Fed's preferred measure of inflation, the core personal consumption expenditures price index, dived to 0.7 percent, the lowest reading since the early 1960s.
That helped the five-year note add 4/32, taking its yield to 3.28 percent from 3.31 percent late Thursday. The 30-year bond gained 14/32, leaving its yield at 4.79 percent from 4.82 percent.
Also out was the University of Michigan's final index of consumer confidence for October, which proved firmer than expected at 91.7, though that was still down from 94.2 in September.
All things considered, analysts held on to their expectations for more "measured" monetary tightening ahead from the Fed.
"We think the Fed is going to raise rates 25 basis points in either November or December, but not both," said Daniel Portanova, a managing director at Gartmore Separate Accounts, a subsidiary of Gartmore Global Investments.
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