Treasury bonds higher after economic reports

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NEW YORK (AP) -- Treasury bonds continued their rally on Wednesday, with another dose of negative economic reports ushering investors into safer positions.

Bond yields, which move in the opposite direction from prices, have continued to fall in recent weeks, suggesting that, even as their returns diminish, investors favor the relative securities of government-backed debt.

Consumer prices plunged in October, a government report showed, a sign inflation is slowing, which supports the value of fixed-income investments. Decelerating price growth also make it easier for policymakers to cut interest rates when the Federal Reserve meets next month.

The Labor Department's Consumer Price Index fell by the largest amount in the past 61 years as gasoline pump prices dropped by a record amount. While lower prices might be good for the consumer, they can hurt corporate profits. Lower prices also raise the threat of deflation, a prolonged bout of falling prices that hasn't been seen in the U.S. since the Great Depression.

The Commerce Department also reported that construction of new homes plunged 4.5 percent last month to the lowest level on government records.

Also contributing to investor concerns were prospects that the government's $700 billion plan to inject money into financial companies might not be enough to help them. A report in the Financial Times suggests that efforts to help homeowners avoid foreclosure might further depress mortgage-backed securities, which were the trigger for massive write-downs that banks took this year.

In late morning trading, the 2-year Treasury note was up 3/32 at 100 22/32, and yielded 1.14 percent, compared with 1.14 percent late Tuesday. The 10-year note rose 30/32 to 100 26/32 and yielded 3.43 percent, down from 3.53 percent. The 30-year bond rose 1 1/32 to 106 14/32 and yielded 4.12 percent, down from 4.12 percent.

Demand for short-term Treasurys was unchanged. The yield on the three-month Treasury bill fell to 0.09 percent from 0.10 percent. Shorter term debt is also the most influenced by interest rate changes.

There were also some signs that banks are beginning to lend more freely to each other. Dollar lending rates between banks dipped for the first time in three days after last week's turnabout by U.S. Treasury Secretary Hank Paulson on the $700 billion U.S. financial rescue program fostered renewed uncertainty in credit markets.

Borrowing rates were little changed. The rate on three-month loans in dollars - known as the London Interbank Offered Rate, or Libor - fell to 2.17 percent from 2.22 percent Tuesday. It had risen in each of the past three trading days. Last Wednesday, following 23 consecutive declines, the rate had fallen to a low of 2.133 percent.

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