U.S. bonds rally and global stocks tumble as ECB raises questions about Turkey contagion

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U.S. government bonds rallied on Friday, driving yields to their lowest levels in recent weeks as turmoil in Europe, sparked by questions about a knock-on effect from economic distress in Turkey, rattled investors and sent them fleeing to the perceived safety of sovereign paper.

The 10-year Treasury note yield

TMUBMUSD10Y, -1.09%

 lost 3.6 basis points to 2.899%, a day after marking its largest one-session yield decline since July 3, based on values around 3 p.m. Eastern, according to Dow Jones Market Data.

The 30-year bond yield

TMUBMUSD30Y, -1.20%

 shed 3.3 basis points to 3.048%, after its sharpest yield decline in a day since June 27.

The two-year note yield

TMUBMUSD02Y, -0.46%

gave up 1.7 basis points to 2.633%, following its biggest daily yield drop also since July 3 on Thursday.

Read: Dollar index jumps to around one-year high as Turkey’s lira gets rocked

Bond prices rise as yields fall.

Equities across Europe, including the pan-European Stoxx Europe 600 index

SXXP, -0.89%

stumbled following a Financial Times report that the European Central Bank is growing more concerned about exposure of European banks to Turkey’s woes. The Turkish lira

USDTRY, +7.5073%

 was sent plunging to its lowest in a year against the U.S. dollar on Friday.

The 10-year German bond

TMBMKDE-10Y, -8.89%

known as the bund, saw its yield fell to 0.346%, compared with 0.377% on Thursday, and the main benchmark of Europe’s largest economy on the eurozone, the DAX

DAX, -1.65%

traded 1.6% lower, on track for its steepest daily drop since Jan. 25.

U.S. government debt markets, however, will keenly watch for a reading of consumer inflation later in the morning, after the Labor Department’s producer-price index came in below average analysts’ estimates surveyed by MarketWatch for a 0.2% gain.

The consumer-price index for July is due at 8:30 a.m. Eastern Time, with a rise of 0.2% expected.

Inflation is a key data point for fixed-income investors because rising inflation can erode the fixed value of debt instruments. Also, rising inflation can cause the Federal Reserve to act more promptly in trying to normalize interest-rate policy to combat out-of-control rising prices and inflation.

Thursday’s PPI reading however suggested that inflation is running at relatively muted pace, stoking some appetite for bonds. However, market participants have warned that geopolitical events, including those in Turkey, could push yields lower, reflecting an increase in demand for haven assets.

On Thursday, Chicago Fed President Charles Evans said during an interview with media that “it wouldn’t surprise,” the Fed if inflation gets above the central bank’s annual target of 2% “a little bit.” He said “that is nothing to be worried about.”

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Mark DeCambre is MarketWatch’s markets editor. He is based in New York. Follow him on Twitter @mdecambre.

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