The rally in oil prices to a record above $135 per barrel drove up the benchmark 10-year Treasury note's yield to 3.96 percent on Thursday, near its 2008 high. U.S. crude oilretreated slightly from those peaks to trade just below $131 on Friday.
The bond market will observe an early close at 2 pm Friday, while the market is closed Monday for the Memorial Day holiday. The prospect of a long weekend lent some momentum to buying of government securities.
"The decline in equities is impacting Treasurys," said Mary Ann Hurley, senior Treasurys trader in Seattle at brokerage D.A. Davidson.
"Given the magnitude of price declines we have had this week, I think there is some bottom-fishing going on and people are having to cover short positions ahead of the long weekend," Hurley added.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 23/32 for a yield of 3.83 percent, versus 3.92 percent late Thursday.
Kim Rupert, managing director of global fixed income analysis with Action Economics LLC in San Francisco, said Treasurys were helped by "a little bit of bargain-hunting with yields near new highs for the year and by weakness in equities."
The Dow Jones industrial average fell about 1.1 percent to 12,483 points.
The two-year Treasury note's price rose 6/32 for a yield of 2.43 percent, versus 2.54 percent late Thursday.
Treasurys briefly pared some gains and then resumed their rally in the aftermath of a slightly firmer-than-expected existing home sales report for April.
But the supply of homes climbed and prices continued to fall. The crumbling housing market, along with tighter credit conditions and surging gasoline prices, still poses a major threat to consumer spending.
"The report wasn't quite as disappointing as the market had expected," said David Dietze, chief investment strategist at Point View Financial Services in Summit, N.J.
"With stocks weaker and ahead of a long weekend, Treasurys have caught a safe-haven bid," he added.
The prospect of marked U.S. economic weakness is helping intermittently to restore a bid even to the longest-dated bonds, which are most vulnerable to mounting inflation pressures.
The 30-year bond rose 30/32 in price for a yield of 4.57 percent
Inflation pressures threaten to push global bond yields higher in coming months, Merrill Lynch global economists signaled in a research report on Friday. They sharply marked up Merrill's forecast for global consumer price inflation to 4.9 percent in 2008 from the previous 3.4 percent.
PMI data showed the euro-zone service sector nearly stalled in April, one of the worst readings in 4-1/2 years.
The bond market's "underlying concerns" remain, Hurley said. "The problems with inflation have not gone away and next week the market has to deal with supply," via 2-year and 5-year Treasury note auctions, Hurley added.
Dietze expects that the 10-year Treasury yield will rise to about 4.25 percent by the end of the year as inflation pressures slightly outweigh the prospects for marked US economic weakness.
"On the one hand you have higher producer prices, commodities and higher energy prices, which will be pushing up inflation and inflation expectations. On the other hand I am not sure we have seen the end of near-recessionary conditions in this country," he said.