US Treasury debt prices rose modestly on Friday, helped by the long end of the yield curve after a report on import prices, particularly for non-petroleum items, eased worries about accelerating inflation.
Support for longer-dated bonds also followed vows by Federal Reserve officials this week to flex their inflation-fighting muscles if necessary.
The 10-year Treasury note rose 5/32 for a yield of 4.12 percent, down from 4.14 percent late on Thursday. Yields are up from 4.04 percent a week ago.
The Labour Department said US import prices rose 1.3 percent in August, slightly above Wall Street forecasts, while July's import price gains were revised to show a 0.8 percent rise instead of 1.1 percent, as initially reported.
Much of the overall increase reflected soaring petroleum costs, up 42.5 percent in the past 12 months.
"The good news is that what we've seen is an unchanged reading for the non-petroleum items so it doesn't look like we have a major inflation problem outside of oil, which is good for the Fed," said Gary Thayer, chief economist at A. G. Edwards & Sons in St. Louis.
On Thursday, San Francisco Fed President Janet Yellen indicated that the central bank stood ready to fight inflation risks, which seem to be on the rise on various fronts, especially after Hurricane Katrina.
"In order to maintain that credibility as an inflation fighter, you have to make sure that you stand ready to maintain price stability," Yellen said.
The comments followed Wednesday's remarks by Chicago Fed President Michael Moskow, who worried that core inflation is running at the high end of an acceptable range.
Longer-maturity bond yields tend to rise if higher inflation expectations become ingrained in the market's psyche - an outcome that the central bank seems determined to prevent.
Otherwise, trading on Friday was relatively quiet as dealers took an end-of-week breather.
Other markets gave mixed signals, with equities prices up strongly but crude oil higher at times and making a stand near $64 per barrel.
Debt futures, in particular, have closely tracked movements in energy prices over the past week. The peak in crude oil futures coincided with ideas that the Fed might pause its program of rate increases at this month's meeting.
Weekly figures from the Commodity Futures Trading Commission showed large speculators had been evenly balanced in 10-year note futures as of Tuesday, showing indecision about the direction of interest rates.
Short-term rate futures show a 78-percent chance that the Fed will raise the federal funds rate by 25 basis points on September 20, up from 66 percent early in the week.
"We get the feeling that the Fed uses their read on energy price inflation as a vehicle to signal future policy decisions ... When they plan to move higher they talk about pass-through," strategists at IDEAglobal said in a research note.
This week Moskow, Yellen and the Fed's Beige Book all referenced potential pass-through of higher energy prices to core inflation, although Yellen also cited the risks posed to spending and growth.
The implied year-end level is 3.94 percent, suggesting the market looks for the Fed to skip a rate increase at one of its three remaining meetings in 2005.
The 30-year bond rose 16/32 to yield 4.40 percent, down from 4.43 percent on Thursday. Five-year Treasury notes were up 2/32 at a yield of 3.93 percent, down from 3.95 percent.
Two-year note yields, the most sensitive to Fed policy, were at 3.87 percent, similar to Thursday.
The two-year/10-year yield spread narrowed to 24 basis points from 27 bps on Thursday as traders looked ahead to the potential for more Fed rate hikes.
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