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Bond Prices Rally as Inflation Fears Subside

Treasury debt prices rose Friday after a key inflation reading that was in line with expectationsprovided investors some relief that price pressures may not be careening out of control.

Bond prices were also supported by month-end position squaring and some short covering after three previous sessions of sharp losses.

Government data showed the core personal consumption expenditures price (PCE) index, which does not include food and energy prices and is one of the Federal Reserve's favored measures of inflation, rose by 0.1 percent in April, which was as expected.

"The inflation data is pretty mild ... Treasury prices are up a little bit -- the (PCE) numbers were not quite as bad as they could have been," said Scott Brown, chief economist with Raymond James & Associates in St. Petersburg, Fla.

Benchmark 10-year Treasury notes were trading 12/32 higher in price for a yield of 4.03 percent from 4.08 percent late Thursday, while 2-year Treasury notes were trading 4/32 higher in price for a yield of 2.62 percent, down from 2.69 percent.

Bond prices have plunged in the previous three sessions and yields have risen, driven primarily by expectations that high food and energy costs will permeate the entire economy and boost inflation.

Traders moved on Friday to take back some of those recent losses.

"You do have some month-end buying that is offering a little bit of support, and the market was perhaps oversold given the extent of the sell-off through yesterday afternoon, so there may be some short covering ahead of the weekend," said John Canavan, analyst at Stone & McCarthy Research Associates in Princeton, NJ.

Some analysts have been forecasting the Fed will have to reverse its recent monetary loosening campaign and begin to raise rates later in the year to combat inflation.

Investors were now looking ahead for further market direction to the release of an index of Midwest business activity for May later Friday morning.

Five-year Treasury notes were trading 7/32 higher in price for a yield of 3.38 percent from a high yield of 3.52 percent in an auction of the notes Thursday.

The 30-year bond was 14/32 higher for a yield of 4.72 percent from 4.75 percent.

Treasury debt prices extended gains Friday after a reading of core PCE inflation rose 0.1 percent in April, matching economists' median forecast.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 10/32 for a yield of 4.04 percent, versus 4.06 percent before the data and versus 4.08 percent late Thursday.