Treasury prices surged Friday morning as the major stock proxies struggled, then gradually pared their gains as stocks clawed their way into positive territory.

Still, intermediate- and long-term Treasuries ended with substantial gains, and their yields dropped to new lows for the year. It was the fifth consecutive session in which intermediate- and long-term Treasury prices rose.

Today's action was driven by a combination of things, market participants said: Fear of big trouble in stocks and riskier bonds, a situation in which Treasuries should perform extremely well. Political issues dogging the agency sector of the riskier bond market. The shrinking supply of Treasury issues. And still-low inflation, which allows investors to buy long-maturity debt instruments without fear that their value will sink.

And so, Treasury prices keep rising, even as the economy keeps showing signs of strength, dumbfounding many traders.

"I'm just watching it go higher. It's killing me here," one snapped around midsession.

Against a backdrop of second- and third-tier economic data, the benchmark 10-year Treasury note, which traded up as much as 11/32 when stocks bottomed shortly before noon, ended up 7/32 at 103 17/32, dropping its yield 2.9 basis points to 6.019%, the lowest since Nov. 16. The 30-year Treasury bond, which gained as much as 21/32 earlier, ended 17/32 higher at 105 25/32, lowering its yield 3.7 basis points to 5.839%, the lowest since May 28.

But the two-year Treasury note remained stuck in place, at a yield of 6.483%, as it typically does during periods when the

Fed

is in the process of raising the

fed funds rate

, the short-term interest rate it controls.

At the

Chicago Board of Trade

, the June

Treasury futures contract gained 16/32 to 97 22/32.

"Treasuries are being looked at much like they were in the latter part of 1998, as an insurance policy on any type of equity correction or credit event," said David Connors, head of government bond trading at

Credit Suisse First Boston

. "The idea is, Treasuries are still the security that investors will flee to in the event they're getting out of stocks or credit products."

Combine that dynamic with the

Treasury Department's

plans to reduce the supply of Treasury securities through lessened new issuance and buybacks, and low inflation, and "everything is conspiring to lift Treasuries right now," Connors added.

And he doesn't see the conspiracy giving up the ghost. "We're not at a level at which people are balking," he said. "If the bond rallies another 50 basis points, maybe we would start hitting a limit."

Still, from moment to moment, the Treasury market has been responding most directly to stock prices. "It's very well bid, but starting to feel tired as the equity market is recovering,"

Banc One Capital Markets

trader Richard Bodkin said around midday.

It certainly isn't responding to evidence that the economy is slowing, since there isn't much of that. And because the riskier bond markets are under pressure, leaving mortgage and corporate bond rates at relatively high levels, the move in Treasuries won't have a stimulative effect on the economy.

"It's not going to have an economic impact, nor does it reflect one," said Jim Glassman, senior U.S. economist at

Chase Securities

. "It doesn't contradict what the economic factors are saying because the market is already priced for Fed tightening. Strong news isn't news. It just means there are other things going on."

Economic Indicators

In economic news, the

Chicago Purchasing Managers' Index

advanced for the third month in a row in March, rising to 57.4 from 56.7. But it remains well below its April 1999 peak of 63.3. A sub-index measuring prices paid by Chicago-area manufacturers rose to 74.2 from 68.9.

Another manufacturing indicator dipped in March. The

APICS Business Outlook Index

fell to 49.8 from 53.5.

Manwhile, spending grew at a faster pace than incomes in February, common occurrence lately.

Personal income

rose 0.4% while personal consumption expenditures rose 1.0%.

Factory orders

slipped 0.8% in February, but the year-on-year pace rose to 8.3% from 6.8%. The report revised the February change in

durable goods orders

from -2.3% to -2.7%, and the change ex-transportation durable goods orders from -0.2% to -0.7%.

Finally, the

Consumer Sentiment Index

fell to 107.1 in March from 111.3 in February. It reached an all-time high of 112 in January.

Currency and Commodities

The dollar sank against the yen and gained against the euro. It lately was worth 102.77 yen, down from 105.39. The euro was worth $0.9555, down from $0.9609. For more on currencies, please take a look at

TSC's

new

Currency Watch column.

Crude oil for May delivery at the

New York Mercantile Exchange

rose to $26.85 a barrel from $26.70.

The

Bridge Commodity Research Bureau Index

rose to 214.31 from 211.46.

Gold for April delivery at the

Comex

rose to $281.40 an ounce from $279.10.