But fixed income analysts have long warned that should energy and food price surges become ingrained trends, longer maturity bond yields may spike at some point. Inflation erodes bond values over time.
The inflation-sensitive 30-year bond's price fell nearly two whole points. Its yield, which moves inversely to its price, rose to 4.66 percent from 4.54 percent late Wednesday.
As crude oil hit new highs above $135 per barrel, ramping up costs for driving, air travel and heating for consumers and threatening to boost the prices of sundry goods and services, the dangers of a major bond market rout are rising.
"A lot of people are trying to get a handle on what the impact of $135 dollar oil is on the economy," said Scott Brown, chief economist with Raymond James & Associates in St Petersburg, Fla.
The global crisis that erupted last August, the most severe in decades, has driven investors to park funds temporarily in the comparative safety of the Treasury market.
But inflation is the arch enemy of bonds, and investors could rapidly lose their tolerance for the negative real returns that benchmark US securities now offer.
"In Treasurys you had a huge flight to quality and liquidity over the last few months, so yields seem artificially low given the threat of inflation," Brown said.
The benchmark 10-year Treasury note's price fell 1-3/32 for a yield of 3.94 percent, versus 3.81 percent late Wednesday.
"The low inflation rate that we have enjoyed for a long period of time is probably going to be breached at some point," and the Treasury market's selloff on Thursday is a response to that view, said William Larkin, portfolio manager with Cabot Money Management in Salem, Mass. "We are definitely braced for higher inflation," he said.
By the end of the year, the 10-year Treasury note's yield could rise to about 5 percent if energy costs stay high, Larkin said.
Some analysts expect yields could go even higher, but the prospect that the economy may weaken markedly toward the end of the year is capping yields.
"If oil is at $150 coming into the fall, the consumer will find it difficult to get credit, they are losing money on their house and wages are not keeping pace with inflation. When you throw in driving costs and heating costs that is a big headwind and raises the chances of recession," said Larkin.
Treasurys hardly reacted on Thursday to housing regulator OFHEO's report showing that home prices fella record 3.1 percent in the first quarter from the first quarter 2007, reflecting the degree to which bonds have already priced in a long-running housing decline.
Bond investors' view that the Fed is unlikely to cut interest rates anytime soon and may raise rates near the end of this year has remained intact since the central bank downgraded its 2008 economic growth forecasts but marked up inflation expectations on Wednesday, hinting at the risks of stagflation. That's a scenario Americans last experienced during the 1970s and 1980s in which inflation pressures grow, but economic growth stagnates or slips.
The two-year note yield, which moves inversely to its price, jumped back above 2.50 percent for the first time in nearly a week to the higher end of its recent ranges.
The two-year Treasury note's price fell 8/32 for a yield of 2.54 percent, versus 2.41 percent late Wednesday.