Treasury prices extended their gains Friday as investors saw more signs that the Federal Reserve won't need to raise interest rates soon.
The Commerce Department reported that personal spending rose 0.8 percent in May as taxpayers began to receive their tax rebate checks. The reading was above projections, and signaled that consumers are still managing to spend despite higher food and energy prices.
Meanwhile, the department said a closely watched inflation gauge tied to consumer spending was up 0.4 percent in May. Excluding energy and food, the increase was a much smaller 0.1 percent. Core inflation over the past 12 months, excluding food and energy, is up 2.1 percent _ just above the Fed's comfort zone.
The report was benign enough to put investors at ease that the Fed can hold off raising rates to combat inflation. Policymakers on Wednesday left the Fed's key federal funds rate on hold, and did not indicate that a rate hike was coming anytime soon, but they did warn that inflation remains a risk to the economy.
Higher rates and inflation tend to erode the value of fixed-income investments, so Friday's news was reassuring to bond investors.
Treasurys were also looking increasingly attractive amid continuing losses in the stock market and talk that banks might suffer more losses and be forced to sell assets or raise new capital. A Lehman Brothers analyst lowered his estimates for Merrill Lynch & Co., and predicted the nation's largest brokerage would have some $5.4 billion in new write-downs from credit losses.
The benchmark 10-year note rose 5/32 to 98 30/32, and its yield fell to 4.01 percent from 4.03 percent late Thursday, according to BGCantor Market Data. Yields move in the opposite direction from prices.
The 30-year long bond rose 13/32 to 96 29/32. Its yield fell to 4.56 percent from 4.60 percent on Wednesday.
The 2-year note rose 2/32 to 100 13/32 with a yield of 2.67 percent. The yield was unchanged from late trading on Thursday.
On Thursday, bonds rallied after concerns about banking stocks and sharply higher oil prices kicked up demand for government debt.
In late trading, the yield on the 2-year note fell to 2.63 percent; the 10-year note fell to 3.97 percent; and the 30-year bond dropped to 4.53 percent.
The yield on the 3-month bill fell to 1.78 percent from 1.79 percent, while its discount rate was 1.76 percent, compared to Thursday's 1.77 percent.
"Right now we're banging around between worries about multiyear high inflation and worries about potential problems in the financial system," said T.J. Marta, fixed-income analyst at RBC Capital Markets. "Neither one of those are going to go away."
