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The selloff in the stock market rescued the bond market, enabling it to post modest gains on the day. Continuing a process that has been under way to a greater or lesser degree all year, sinking stock prices gave the bond market a boost by encouraging the view that economic growth will slow.

Early in the session,

Treasury prices fell as oil climbed to a two-week high in response to strife in the Middle East and falling temperatures. Rising oil prices alarm bond investors by threatening to lift the overall inflation rate.

However, with no major economic data on the calendar (and none due out till Friday, which brings the

retail sales report and

Producer Price Index for September), volume was light, diminishing the significance of the price action. According to tracker

GovPX, just $20.3 billion of Treasuries changed hands through 3 p.m. EDT, 30.8% less than average for a Tuesday over the past month.

The benchmark 10-year

Treasury note gained 5/32 to 99 20/32, dropping its yield 2.8 basis points to 5.797%. Shorter-maturity yields fell by comparable increments.

The 30-year

Treasury bond rose 13/32 to 106, lowering its yield 2.9 basis points to 5.821%.

At the

Chicago Board of Trade

, the December

Treasury futures contract added 9/32 to 99 5/32.

Early in the session, "the continued increase in energy prices weighed on the market a bit in the long end," said Gemma Wright, Treasury market strategist at

TheStreet Recommends

Barclays Capital

, referring to the longest-maturity Treasury issues. The longer the maturity of a bond, the more vulnerable it is to a rise in inflation.

Even though rising energy prices haven't yet led to more broad-based price increases, bond investors worry about the prospect that they might.

The stock market selloff distracted the bond market's attention from oil prices, enabling it to recoup its losses and post small gains. The theory here is that falling stock prices will slow the economy, keeping inflation in check, by tempering consumer confidence and thus consumer spending, the economy's main engine.

But Wright says the second derivative of falling stock prices is potentially negative for bonds. That's why the bond market didn't rally harder in response to the equity market rout, she says.

To the extent that stock prices are falling because corporate earnings are deteriorating, it is a reminder that companies are losing the flexibility to absorb higher energy prices, rather than pass them along to customers in the form of higher prices, Wright says. "The longer-term theorizing that's going on is keeping the bond market from rallying more."

Meanwhile, investors in Treasuries are also watching out for a possible onslaught of new corporate bonds, which compete with Treasuries for investor dollars.


(UN) - Get Unilever NV ADR Report


Telecom Italia



France Telecom



British Telecom


are all expected to float multibillion dollar bonds before the end of the year. The Unilever deal is expected by the end of next week. The timing of the rest is uncertain, but some are considered likely to come this month.

Economic Indicators

The weekly retail sales reports posted middling results for the first week of October. The

BTM Weekly U.S. Retail Chain Store Sales Index


definition |

chart ) gained 0.2%, a small gain but its largest in four weeks. The

Redbook Retail Average


definition |

chart ) found October sales running 0.5% ahead of September after one week.

Currency and Commodities

The dollar fell against the yen and the euro. It lately was worth 107.73 yen, down from 108.84. The euro was worth $0.8718, up from $0.8682. For more on currencies, see


Currencies column.

Crude oil for November delivery at the

New York Mercantile Exchange

rose to $33.18 a barrel from $31.86.


Bridge Commodity Research Bureau Index

, boosted mainly by energy prices, rose to 230.37, a two-week high, from 227.43.

Gold for December delivery at the


rose to $275.10 an ounce from $272.90.