Treasury debt prices rose Tuesday as record high oil prices heightened prospects for a slower economy and falling equities pushed funds into safe-haven government bonds.
Investors, fearing corporate profits would suffer from high energy costs, sold stocks and bought safe-haven Treasurys.
U.S. crude oil jumped to new record highs above $129 as influential Texas oil man T. Boone Pickens forecast a rise to $150 this year.
The government's report that producer prices, excluding volatile food and energy, grew at a faster-than-expected pace in Aprilalso hurt stocks, giving bonds an early lift.
Though bonds would typically fall on any sign of stronger inflation, which erodes the value of fixed-income investments, they moved up because stocks fell, traders said.
April's producer price increases were concentrated in the capital goods category and reflected strong demand from abroad for these items -- and not necessarily an increased threat of inflation for consumers, some economists said.
"We traded above $129 a barrel for crude oil and investors have started to get evidence that the high cost of energy is beginning to effect corporate earnings," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Fla.
On Monday, the chief executive officer of SanDisk, the world's top maker of data-storage memory chips, said record oil prices were likely to put pressure on discretionary spending, analysts noted.
"That was a stunning development, suggesting that even technology firms are beginning to be adversely influenced by these record high oil prices," Sullivan said.
Though high oil prices can be viewed as inflationary and thus a potential negative for bonds, "it appears that Treasurys got support from rising energy costs because those costs led to a sharp selloff in equities," Sullivan said.
That selloff would be a sign that the equity market is "finally capitulating to the negative aspects of higher energy prices: a slowdown in the broad economy, a pullback in discretionary spending by US households, and a poorer outlook for corporate earnings," he said.
"If the rise in energy prices is perceived as a negative for the economy, then it can be viewed as a positive for Treasurys," he said.
Reinforcing that scenario is that a slower economy would worsen the credit crisis, "and that's another plus for Treasuries," Sullivan said.
Treasurys were also bolstered by a fall in shares of banks, including JPMorgan Chase, fell after an influential analyst warned that the credit crisis was far from over and could extend beyond next year.
Since the beginning of the year, as 10-year Treasury note yields have risen to 3.90 percent or 3.91 percent, Treasurys have drawn buyers.
"Dealers say there is real retail interest at 3.90 percent," said Chris Rupkey, vice president and chief financial economist at Bank of Tokyo/Mitsubishi.
In midday trade, with the Dow Jones industrial average down 206 points, or 1.6 percent, the benchmark 10-year Treasury note was up 7/32 in price while its yield, which moves inversely to its price, eased to 3.81 percent from 3.83 percent late Monday.
Two-year notes climbed 5/32 in price, their yields easing to 2.33 percent from 2.40 percent Monday.
Five-year notes rose 8/32 in price, their yields easing to 3.04 percent from 3.09 percent late on Monday. The 30-year bond rose 8/32, its yield easing to 4.56 percent from 4.57 percent late Monday.