US Treasury debt prices rallied on Friday as the latest trade and consumer data cast doubt on conventional wisdom that the US economy is poised for stronger growth ahead.
As oil prices soared to new heights above $46 a barrel and stocks ended only slightly above fresh lows for the year, the combined effect was to increase flows into government debt, lifting the benchmark 10-year note 10/32 for a yield of 4.24 percent.
Investors have begun to doubt the Federal Reserve's theory that recent economic weakness was simply a soft patch.
Bond bulls were hoping continued softness in the data and ever-costlier fuel might force the central bank to moderate the pace of monetary tightening.
"If crude oil prices keep on rising, the chances that consumption is going to be hurt further down the line rises," said Peter Kretzmer, senior economist at Banc of America Securities.
"That means the Fed could be more gradual in raising rates."
Two-year notes rose 2/32, their yields easing to 2.46 percent from 2.49 percent on Thursday.
Five-year notes climbed 8/32 in price, taking their yield to 3.42 percent from 3.48 percent.
The 30-year bond was up 16/32, sending yields down to 5.02 percent from 5.05 percent on Thursday.
Interest-rate futures were still showing a better than even chance the Fed will hike rates at its next meeting in September, an echo of the central bank's optimism of the economy at its last policy meeting.
Bonds got an early lift on news that July producer prices were subdued and that the June trade gap was so large that second-quarter GDP could be lower than first reported.
The PPI rose 0.1 percent in July, as did the core index excluding energy and food, a favourable result for inflation-obsessed fixed-income investors.
"The PPI number had some pipeline pressure underneath the surface, but the market liked the fact that the core rate was up only 0.1 percent," said Cary Leahey, senior US economist at Deutsche Bank Securities in New York.
Even better for bonds, the June trade deficit ballooned to $55.82 billion, way above expectations while the real deficit, adjusted for inflation, hit $59 billion.
Analysts said the record trade gap in June would knock down estimates of second-quarter gross domestic product (GDP) growth to less than 3 percent.
"The overall weaker GDP number coming from the trade data does give you a more bullish feeling on Treasuries," said Banc of America's Kretzmer.
With US crude jumping to a new high of $46.65 a barrel on Friday, concerns about energy costs conspired with a shoddy job market to dampen consumer moods - all to the benefit of Treasuries.
The September crude oil futures contract also settled above $46 a barrel for the first time ever on Friday - ending at $46.58, up $1.08 on the New York Mercantile Exchange.
The University of Michigan index of consumer confidence fell to 94.0 in August when analysts had looked for a rise to 97.5 from 96.7 in July.
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