Treasurys stormed higher Friday, sending yields to one-week lows as surprisingly grim housing data highlighted concerns that the economy was mired in a slump as 2007 drew near its close.
Sales of new single-family homes fell much more than expected in November and marked their slowest annual pace in more than 12 years, according to a government report.
The troubled housing market has been at the center of distress in financial markets that has sent investors scurrying to the safety of government bonds. The latest data suggested little reason to hope this would change any time soon.
"The new home sales report was horrible and the Treasury market reacted appropriately with yields falling and prices rising," said Joseph Brusuelas, chief U.S. economist at IDEAglobal in New York.
"Demand for new homes continues to fall in an environment of price uncertainty ... There are too many homes on the market that are currently overpriced."
Prices on the benchmark 10-year note rose more than a full point, trading up 1-5/32 to yield 4.06 percent. The 30-year long bond rallied two full points to yield 4.49 percent.
Bonds got a further lift as the stock market's earlier gains dissipated, though trade in Treasurys was thin, as it often is at the year-end holiday period.
"The only thing that was bond-negative today was that stocks looked like they were going to put in a strong performance, and that's questionable now," said Rick Klingman, managing director of U.S. Treasury trading at BNP Paribas in New York.
Ten-year noteswere on track for their biggest day of gains in more than two weeks, based on the fall in yields. For the week, benchmark notes looked set for their strongest rally this month.
The latest gains came after bond prices rose Thursday in the wake of weak economic data and warnings that big-name Wall Street firms may face more losses due to the mortgage meltdown.
This dour backdrop has led investors to focus primarily on weak data as evidence that the severe tightening of credit this year is infecting the broader economy.
In fact, other data released Friday showed business activity expanded in the U.S. Midwest in December. The National Association of Purchasing Management-Chicago's business barometer rose to 56.6, its strongest level since June, from 52.9 in November. Economists had forecast a reading of 51.8.
Anything above 50 indicates expansion.
However, some elements in the report provided a reason to buy bonds, particularly figures on softer inflation pressures and employment.
"The data on new home sales was weak and the Chicago Purchasing Managers Index, although the headline was up, had some bond-friendly components like weaker employment and a drop in prices paid," said John Spinello, Treasury bond strategist at Jefferies & Co. in New York.