US Treasuries rallied on Friday despite firm industrial output and inflation figures, as several weeks of selling prompted some investors to creep back into the market.
Friday's data largely reaffirmed expectations for an interest rate hike from the Federal Reserve at its next meeting in late June.
Yet traders noted bonds had gotten so cheap after an eight-week sell-off - the market's worst uninterrupted losing streak in a decade - that some brave souls were willing to stick their necks out.
"The market was very, very oversold," noted Richard Gilhooly, fixed-income market strategist at BNP Paribas Corp "Everyone was short."
While the Fed has vowed to be measured in its pace of monetary tightening, many investors fear rising inflation could force them to move faster and farther to stem rising prices.
But Gilhooly warned that the central bank needed to make clear that it did not foresee an imminent spike in inflation, if only to prevent anxiety over a possible rapid series of rate hikes from rattling financial markets world-wide.
"If the market even begins to price in a fed funds rate of 3.5 percent over the next year I think you would have an all-out crash in the asset markets," he said.
The headline US consumer price index rose 0.2 percent in April when analysts had looked for a 0.3 percent gain. But the more important core index, excluding food and energy, firmed 0.3 percent, above forecasts of a 0.2 percent rise.
Annual growth in the core CPI measure climbed to 1.8 percent, its highest level since January last year, and closer to the top of the Fed's presumed comfort range of 1-2 percent.
However, some analysts had predicted an even higher core figure, so the results offered the market a semblance of relief. The minority of Wall Street economists forecasting a Fed rate move in August stuck with that view, saying they would wait for May jobs data before revisiting their estimates.
In afternoon trade, yields on the benchmark 10-year note had backed off a two-year high of 4.90 percent hit immediately after the price data, down to 4.77 percent.
Five-year notes rose 18/32, lowering its yield to 3.91 percent from 4.04 percent. The 30-year bond climbed just over a full point, leaving yields at 5.49 percent from 5.56 percent.
The two-year note added 8/32 in price, taking its yield to 2.54 percent from 2.67 percent.
Traders reported one money manager had been a big buyer of note futures, while a survey of consumer confidence proved softer than expected forcing yet more short-covering.
A testament to the recovery's strength, industrial production jumped 0.8 percent in April, easily beating forecasts of a 0.3 percent gain and getting the second quarter off to a strong start.
"We're looking for GDP growth of five percent or more this quarter and the outlook is for more of the same as the economy fires on all cylinders," said Ram Bhagavatula, chief economist at RBS Financial Markets, of US gross domestic product.
"We fear the Fed has pushed too far with its monetary policy accommodation and will have to hike in a hurry," said Bhagavatula, who expects 100 basis points, or one percentage point, of tightening this year and 250 basis points in 2005.
"That adds up to a couple of tough years for bonds. If we're right and inflation takes off, then the sky's the limit for yields," he added.
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