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Weakness in stocks and the fact that it was the last business day of the month and of the third quarter enabled the bond market to shake off some stronger-than-expected economic news and post modest gains.

Bond market participants head into next week focused on the question of whether the

Fed will declare the risks to the economy to be balanced between too-high inflation and too-slow growth, after nearly a year and a half of describing them as weighted toward too-high inflation.

The benchmark 10-year

Treasury note rose 5/32 to 99 19/32, dropping its yield 2.1 basis points to 5.804%. Shorter-maturity yields shed comparable amounts.

The 30-year

Treasury bond gained just 1/32 to 105 3/32, trimming its yield a fraction of a basis point to 5.884%. At the

Chicago Board of Trade

, the December

Treasury futures contract gained 5/32 to 98 21/32.

Money flowing out of stocks and into bonds was largely responsible for today's gains, market analysts said. Bond prices often rise when stocks are suffering, both because of asset reallocation, and because investors believe falling stock prices will put the brakes on economic growth. When growth slows, interest rates fall and bond prices rise.

"There was a good bid to the front of the market" -- short-maturity issues, that is -- "from the stock market,"

MCM Moneywatch

Treasury market analyst Roseanne Briggen said.

At the same time, longer-dated Treasuries benefited from the last-day-of-the-month effect, in which the various indices that track the bond market are reconfigured to incorporate the month's new issues and boot out the oldest bonds. The shake-up prompts buying of all types of bonds by investors who mimic the indices.

The end of the third quarter, which induces portfolio managers to stock their funds with whatever they want to show to shareholders on that date, benefited the markets in a more drawn-out way over the course of the last week, Briggen said. The quarter-end effect particularly benefited

agency securities, she said.

Combined, those factors enabled the market to shrug off evidence that the economy is not slowing as quickly as bond investors and the Fed might like.


Chicago Purchasing Managers' Index


definition |

chart ), was stronger than expected. It rose to 51.4 in September from 46.5 in August, indicating renewed expansion in the manufacturing sector.

And the

personal income and consumption


definition |

chart |


) report for August registered a gain in personal consumption (a.k.a. consumer spending) of 0.6%, double what economists were looking for on average. Income rose 0.4%, indicating confidence on the part of consumers, who are willing to increase spending faster than their incomes are growing.

"The numbers show there's still a lot of momentum in the economy," said Mike Cloherty, economist at

Credit Suisse First Boston

. "People have hopes of an economic slowdown, and we have seen some slowing from the extraordinarily strong rates of the beginning of the year, but not dramatically."

Next week's indicators, which include the

Purchasing Managers' Index and the

TheStreet Recommends

employment report should focus the picture considerably,

A.G. Edwards

Treasury market strategist Bill Hornbarger said. Today's surprising gain in the Chicago PMI "puts a bit more emphasis" on the national report, he said.

But the

Federal Open Market Committee meeting on Tuesday could be most interesting of all, if the committee changes its assessment of the balance of risks to the economy. (It is not expected to take any action on rates next week.) Shifting to a balanced assessment would improve the odds of the Fed cutting interest rates at some point in the next several months.

Those odds have gradually been creeping higher. As measured by the April

fed funds futures contract, the odds of a rate cut by the end of the first quarter exceeded 50% for the first time today.

But Hornbarger said the bond market is still split over whether the Fed will change its position, indicating that either outcome could trigger a repricing of the market.

In other news, the

Investment Company Institute

, the mutual fund industry trade group, said bond mutual funds saw outflows of $1.8 billion in August, bringing total outflows for the year to date to $42 billion. In their worst year ever for outflows, 1994, bond mutual funds saw $65 billion go out.

Economic Indicators

In other economic news, the

APICS Business Outlook Index


definition |

chart |


) dipped to 49.3 in September from 51.5 in August.

And the

Consumer Sentiment Index


definition |

chart ) was finalized at 106.8 for September, down from 107.3 in August.

Currency and Commodities

The dollar rose against the yen and fell against the euro. It lately was worth 108.11 yen, up from 107.62. The euro was worth $0.8828, up from $0.8790. For more on currencies, see


Currencies column.

Crude oil for November delivery at the

New York Mercantile Exchange

rose to $30.84 from $30.34.


Bridge Commodity Research Bureau Index

rose to 226.57 from 225.39.

Gold for December delivery at the


fell to $276.90 an ounce from $278.90.