Bonds Rule the Roost

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Nothing helps bonds like a little market volatility. Stock-market volatility, that is.

Changing direction faster than a cockroach running from a can of


, the stock market proved too nerve-racking for many investors Thursday. Rather than tough it out -- and risk getting squashed -- many opted for the time-honored strategy of parking their money in bonds.

The flight from volatility, more commonly referred to as the flight to quality, as well as some reported bond buying by China's central bank, sent bonds on a nifty rally, as the venerable


returned to its losing ways. The 30-year bond tacked on a full point, sending the yield 7 basis points lower to 6.58%.

Of course, more than an equity exodus prompted the fixed-income fiesta. Even though second quarter

gross domestic product

, the broadest measure of the country's economic progress, was revised upward to an eye-popping 3.6%, traders chose to concentrate on the rapid ramp-up of inventories. That, they figured, means America's factories will ratchet back production, causing next quarter's GDP to show a slower economy unlikely to produce inflation.

Evidence prices aren't likely to start spiking higher: The GDP price deflator, the report's key inflation number, was revised to 1.5% from 1.4% in the preliminary report. That move was minor, economists said, given the magnitude of the overall revision.

"Despite solid growth, the inflation rate, as measured by the GDP price deflator, is at a 30-year low," says New Era economist Ed Yardeni, who heads up the economics team at

Deutsche Morgan Grenfell

. "Strong growth and low inflation can coexist."

Still, the good news comes at a cost. Many economists now say a

Federal Reserve

interest-rate hike is an inevitability before the end of the year. After all, with economic growth running at 4.3% for the first half, inflation at a three-decade low and the

unemployment rate

at 4.8%, we might just get used to scraping by.

"Near-potential growth, which the Fed favors, has been restated as a well-above potential rate of expansion," says Ken Mayland, chief economist at


in Cleveland.

The central bank, in an effort to slow the runaway economy, will likely hike rates by 0.25 percentage point in September or November,


economist Peter D'Antonio told



In the meantime, there's plenty to keep everyone occupied Friday.

Friday's numbers

(all times EDT):

Personal income

for July (8:30 a.m.): Consensus estimate is 0.2% versus 0.6% in June.

Personal consumption expenditures

for July (8:30 a.m.): Consensus sees a 0.7% rise versus 0.3% in June.

Chicago Purchasing Managers Index

for August (10 a.m.): Consensus median calls for 60 versus 60.6 in July.

New home sales

for July (10 a.m.): Consensus sees sales falling 0.8% after rising 6.1% in June.

Consumer Sentiment Index

(10 a.m.): The

University of Michigan

releases its final August figures. Consensus estimate sees the widely watched index at 103 compared with 102.8 earlier in the month and 107.1 in July.

Agricultural prices

for July (3 p.m.).