Treasury debt prices rose as a series of bleak reportssuggested the economy may have tipped toward recession, boosting the allure of safe-haven government bonds.
Swirling credit market fears also led worried investors to buy bonds, causing an early rally in two-year notes that pushed yields to their lowest level in nearly four years.
Financial markets then turned their attention to hard data with a gauge of February factory activity in New York state posting its biggest drop on record to nearly a five-year low, which helped refuel the bond rally.
A key measure of consumer confidence also recorded its weakest reading since 1992. The Reuters/University of Michigan Surveys of Consumers index of consumer sentiment fell to 69.6 from 78.4 at the end of January.
"The drop in the University of Michigan survey below 70 for the first time since 1992, I do think that kind of spooked some people and brought the bid back into the bond market," said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore.
Though shorter-dated debt led the rally early on, 10-year notes and 30-year long bonds carried the baton later in the session, which was shortened ahead of the Presidents' Day holiday on Monday when markets will be closed.
Benchmark 10-year notes were last up 13/32 on the day, pushing the yield down to 3.77 percent from 3.82 percent late on Thursday.
The 30-year long bond was up just over a full point in price, which pushed the yield down to 4.58 percent from 4.65 late on Thursday.
Cruel to be Kind
Still, the week was not kind to longer dated debt, with 10-year notes recording their biggest losses since mid-December and long bonds their worst performance since early December, based on the rise in yields.
"We have stabilized here after a pretty good sell-off this week," said Terry Belton, head of fixed income and derivatives strategy at J.P. Morgan Securities in Chicago. "The economic data have been consistently weak. There remains concerns about funding availability and the health of the financial industry."
Two-year notes were down 1/32, yielding 1.92 percent. Two-year yields were little changed on the week.
During Friday's rally, the two-year note's yield fell to around 1.83 percent, the lowest since early 2004.
Dealers said some of Friday's gains were profit-taking from bets on curve steepening that have performed well in recent weeks on the back of safe-haven flows, expectations of further Federal Reserve interest rate cuts and some inflation concerns.
Before Friday's pull-back, the yield curve had reached its steepest level since 2004, measured by the rise in 10-year yields over two-year rates.
Analysts say this trend is likely to reassert itself, especially since inflation concerns have risen, even amid overall weakness in economic data.
The Reuters/University of Michigan report showed one-year inflation expectations jumped early this month, while a separate report showed U.S. import prices surged in January, powered by higher prices for oil.
"Some profit-taking on the massive curve-steepening trade has offered some support to the back end, although bond vigilantes are starting to get their backs up on some of these numbers," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.