The latest leg down in stock prices benefited most of the bond market, as investors continued to interpret the stock market's troubles as a leading indicator of slower economic growth ahead.

But the longest-maturity

Treasury issue, the 30-year

bond, fell, betraying concern about the potential for rising energy prices to push the overall inflation rate higher.

The benchmark 10-year

Treasury note gained 5/32 to 99 25/32, trimming its yield 1.9 basis points to 5.778%. Shorter-maturity yields dropped by comparable increments to new lows for the year. The two-year note's yield fell to 5.964%, while the five-year note's yield dropped to 5.804%.

Meanwhile, the 30-year bond fell 6/32 to 105 28/32, hiking its yield 1.5 basis points to 5.829%.

At the

Chicago Board of Trade

, the December

Treasury futures contract edged up 1/32 to 99 6/32.

With no major economic data on the calendar and none slated till Friday (which brings the September

retail sales report and

Producer Price Index), bond market professionals paid attention chiefly to the stock market,

Goldman Sachs

economist John Youngdahl said.

"The bond market is being dragged around by the nose by the equity market," he said. "That's been the case for the past several weeks but it's particularly true in intervals when there is no fundamental economic data being reported."

Bonds get bid higher when stock prices fall mainly because bond investors expect lower stock prices to help slow the economy, keeping pressure on the inflation rate.

At the same time, falling stock prices make investors reach for bonds because bonds are less volatile. But Youngdahl says the recent demand for bonds is mostly of the former variety. "Market participants are looking at the stock market as a leading indicator on the question of what the economy might do."

The rise in oil prices in recent sessions is also helping the odds of an economic slowdown,

Merrill Lynch

Treasury market strategist Jerry Lucas said. "Every time we've had a sustained increase in the price of oil it's led to a slowdown if not a recession," he said. "The longer it lasts, the greater the probability."

Although oil finished down on the day, it hit a two-week high intraday, and since Sept. 29 has retraced more than a third of the fall it took over the previous week.

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But as the

Federal Open Market Committee noted in its latest

statement on monetary policy, high energy prices have the potential to lead to higher inflation more broadly.

While inflation is ultimately negative for economic growth, it is initially negative for the bond market, and it is most negative for the longest-maturity issues. That helps explain why the longest-maturity Treasury issue (and to some extent the 10-year note) has not fully participated in the rally in response to falling stock prices.

Economic Indicators

The weekly

Mortgage Applications Survey

(

definition |

chart |

source

) detected an increase in refinancing activity and a decrease in new mortgage activity. The Refinancing Index rose to 475, a new high for the year, from 470.6. The Purchase Index fell to 302.8 from 320.4.

Currency and Commodities

The dollar fell against the yen and gained against the euro. It lately was worth 107.54 yen, down from 107.75. The euro was worth $0.8690, down from $0.8715. For more on currencies, see

TSC's

Currencies column.

Crude oil for November delivery at the

New York Mercantile Exchange

fell to $33.10 a barrel from $33.18.

The

Bridge Commodity Research Bureau Index

rose to 231.63 from 230.40.

Gold for December delivery at the

Comex

fell to $273.00 an ounce from $275.10.