Bond prices rose thanks to a sharp drop in oil prices. Also, words from the Fed indicated that it expects the stock market's struggles to lead to slower economic growth.

But on the day before the release of the September

employment report, a day without any major economic releases of its own, volume was light, meaning that price swings were larger than they otherwise would have been. Tracker

GovPX said $26.5 billion of Treasuries changed hands through 3 p.m. EDT, 14.8% below average for a Thursday over the last month.

The benchmark 10-year

Treasury note gained 9/32 to 99 6/32, dropping its yield 3.6 basis points to 5.856%. Shorter-maturity yields fell by smaller increments.

The 30-year

Treasury bond gained 20/32 to 104 28/32, lowering its yield 4.5 basis points to 5.898%.

At the

Chicago Board of Trade

, the December

Treasury futures contract rose 15/32 to 98 9/32.

Though off the 10-year highs it attained last month, oil still continues to exert enormous influence on the bond market. Because rising oil prices are potentially inflationary, investors have been selling bonds when oil goes up and buying them when it goes down, and that continued today.

The effect has been most pronounced in long-maturity issues, whose yields reflect inflation expectations. Short-maturity issues are influenced primarily by the Fed's posture on monetary policy, and could conceivably benefit from higher oil prices, since expensive energy has the potential to slow the economy, prompting the Fed to cut the

fed funds rate.

The words from the Fed were contained in the

minutes of the Aug. 22

Federal Open Market Committee meeting. At that meeting, as at the most recent meeting on Tuesday, the FOMC decided to leave the

fed funds rate at 6.5% but to stick with the view that the economy is at risk of rising inflation.

However, in the minutes, the committee says the Fed's economic forecast anticipates that growth, "after slowing appreciably from its elevated pace of recent quarters, would be sustained at a rate a little below that of the staff's upwardly revised estimate of the economy's potential output."

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That's good news for the bond market in and of itself. Growth at a pace below potential for a sustained period of time could eventually prompt the Fed to cut interest rates.

The minutes further aided the bond market's case with an explanation. "The forecast anticipated that the expansion of domestic final demand would be held back to some extent by the waning and eventual disappearance of positive wealth effect associated with outsized earlier gains in equity prices and by higher interest rates."

The notion isn't new. For much of the year the bond market has benefited from falling stock prices on the theory that they are a leading indicator of economic activity. This is also not the first time the Fed has articulated a connection between the stock market and economic activity. And, the minutes were not devoid of cautionary notes. For example, they said that "many members emphasized that the Committee needed to be prepared to act promptly should inflationary pressures appear to be intensifying." Reiteration of a supportive idea never hurts, though.

Economic Indicators

Initial jobless claims

(

definition |

chart |

source

) rose to 299,000 from 289,000 the previous week, indicating a very slight easing of tight labor market conditions. But the four-week average of initial claims dipped to 306,000, a six-week low, from 309,000.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 109.09 yen, down from 109.30. The euro was worth $0.8687, down from $0.8749. For more on currencies, see

TSC's

Currencies column.

Crude oil for November delivery at the

New York Mercantile Exchange

fell to $30.53 from $31.43.

The

Bridge Commodity Research Bureau Index

fell to 226.45 from 226.99.

Gold for December delivery at the

Comex

rose to $273.40 from $273.20.