For months, pessimistic bond markets and optimistic central bankers have been in a tug of war over where the world economy is headed. A renewed plunge in long-term interest rates world-wide suggests the pessimists are winning.

Government bond yields in the U.S., the euro zone and Asia have all fallen sharply in recent weeks, fed by a diet of disappointing economic data, lackluster business investment and -- in a new development Wednesday -- hopes that the Federal Reserve will soon take a break from raising interest rates.

The decline in long-term interest rates mystifies central bankers -- even Fed Chairman Alan Greenspan. They see creeping inflation risks and a still-robust outlook for the global economy outside of Europe. And they're increasingly concerned that low long-term rates are also fueling an unsustainable surge in housing prices.

Prices of 10-year Treasury bonds jumped Wednesday and yields, which move in the opposite direction, tumbled to 3.89 percent, from 4 percent Tuesday. That's the lowest since March last year, before the first of the Fed's eight quarter-percentage-point interest-rate increases. The drop came after Richard Fisher, new president of the Federal Reserve Bank of Dallas, said that the Fed is in the "eighth inning" of raising rates, suggesting he believed an increase by the Fed later this month might be its last. Investors expect the Fed to boost its target for the federal-funds rate, charged on overnight loans between banks, to 3.25 percent from 3 percent at its meeting on June 29 to June 30.

Mr. Fisher's comments are at odds with those of other Fed officials who have emphasized that interest rates are still too low to ensure low inflation. But his remarks reinforced a view of many bond traders and a few economists that economic growth in the U.S. is slowing and inflation is ebbing, both of which will lead the Fed to take a pause from raising rates.

Bond yields in the U.S. are responding not just to U.S. but to global factors. According to ISI Group, a New York research firm,-- major markets have lower bond yields than the U.S., including Greece, Italy and Taiwan. Low foreign-bond yields encourage investors to buy U.S. Treasurys in search of a better return, pushing down the yields in the U.S. Bond yields have fallen to all-time lows in the six-year-old euro zone, partly because investors expect that the European Central Bank, despite its remarks to the contrary, will cut interest rates soon because of stagnating growth. Japan's bond yields remain close to 1 percent as that country's deflation persists.

But economists are baffled by the behavior of long-term rates. "It's a mystery," said Raghuram Rajan, research director of the International Monetary Fund. "You need a combination of relatively low inflation and relatively low expected growth to explain where rates are." But most forecasts show the most likely move in inflation is "upwards rather than downwards," and -- except for Europe -- "there is fairly strong growth around the world and it's not clear it is going to fall off."

Long-term interest rates are determined by the relative demand for capital (investment) and the supply of capital (savings). "Investment, the world over, has been relatively muted," Mr. Rajan said. The European Union's statistics agency Wednesday said the euro-zone economy grew at a 0.5 percent nonannualized rate in the first quarter from the fourth as investment spending contracted 0.7 percent. While business investment has been brisk in the U.S., just 49 percent of big company chief executives expect to boost capital spending in the next six months, down from 60 percent in March, a survey by the Business Roundtable, a CEO association, found. Meanwhile, investment fell in the first quarter in Brazil and Australia.

Manufacturing activity was the slowest in two years world-wide in May, J.P. Morgan Chase said Wednesday, based on reports from purchasing managers around the world. Fed officials believe the slowdown in the U.S. is a temporary response to high factory inventories. Others blame high energy prices, which are pressuring profit margins. Wednesday, crude-oil prices jumped $2 per barrel.

But business hesitation may be deep-rooted. Vadim Zlotnikov, equity strategist at Sanford C. Bernstein & Co., an investment dealer, says in the U.S., Asia and Europe, capital spending remains historically low relative to cash flow. Businesses, he said, are still determined to avoid the excesses of the 1990s when they spent heavily on wasteful projects. Moreover, they see "relatively few growth opportunities out there," he said.

Dow Chemical Co. recently said it will hold capital spending this year below the level of depreciation and amortization as it seeks to reverse the erosion in profit margins from 1995 to 2002. "The company has no intention to soften its sharp focus on financial discipline," Pedro Reinhard, chief financial officer, told analysts last month. The company expects $1.5 billion in capital spending this year, up from last year but below the $1.6 billion recorded in 2002.

In Germany, analysts say Volkswagen AG isn't investing in new production domestically because it is already underusing its biggest plant at its headquarters in Wolfsburg. The group's core VW brand is losing money, partly as a result of depressed sales in Germany.

In Taiwan, semiconductor makers are hesitant to order new manufacturing equipment because of currently low factory-utilization rates, Dick Aurelio, chairman of Gloucester, Mass.-based Varian Semiconductor Equipment Associates Inc. told a recent conference.

While businesses appear unmoved by the cheap cost of capital, homebuyers around the world have responded to low mortgage rates so enthusiastically that central bankers world-wide worry houses are overvalued. Mr. Greenspan recently said there was "froth" in U.S. housing prices. In Brazil, real-estate lending jumped 65 percent in the January-to-April period from a year earlier with demand from lower-income families especially strong.

The ECB has regularly warned that its historically low interest rates may be causing bubbles in housing prices in some countries, such as Spain and France. Last year, French house prices rose more than 16 percent -- greater than anywhere else in Europe and the U.S., according to the Royal Institution of Chartered Surveyors -- and they are up more than 71 percent since 1998.

While the ECB would like to cool the housing market, it didn't move up its key short-term interest rate, 2 percent, Thursday because the European economy is too feeble to withstand higher rates, particularly Germany, the Netherlands and Italy.

Mr. Fisher, the Dallas Fed president and a voting member of the Fed's policy-making panel, Wednesday became the first Fed policy maker to suggest the Fed might pause in its rate increases soon. "We've gone through eight innings here, 25 basis points an inning," he said in an interview with The Wall Street Journal, referring to the Fed's eight quarter-point increases in the federal-funds rate target since last June. "The next meeting in June is the ninth inning. We'll take a look after that. We may have to go into extra innings in this contest against inflation."

In his interview with the Journal, which followed similar comments he made Wednesday on business cable network CNBC, Mr. Fisher declined to say if his comments meant he favored a halt to interest-rate increases soon, but that's how investors interpreted them. Mr. Fisher's colleagues have maintained that the federal-funds rate is still too low to keep inflation low. And Mr. Fisher himself said: "The economy is strong. It's inflation that's still a risk."