Treasurys rallied after a weaker-than-expected manufacturing reportunderscored the outlook for a weaker economy and easier monetary policy.
The Philadelphia Fed's business conditions index read minus 24.0 in February, down from minus 20.9 in January.
The data reinforced the idea that "the economy is in recession," said Eric Green, economist at Countrywide Financial in Calabasas, Calif.
The fourth consecutive decline in an index of future economic activity also provided evidence of a manufacturing recession, said Pierre Ellis, senior economist at Decision Economics in New York. The Conference Board's index of leading economic indicators slipped 0.1 percent in January.
Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vt., said the weak Philadelphia Fed reading "encouraged the bid for longer-dated Treasurys and reversed the selling that was seen earlier in the session in the short end of the Treasury curve."
Still, profit-taking on yield curve-steepening trades narrowed the differences between short- and long-term yields.
The difference between 10-year note yields over two-year yields stood at 170 basis points in late morning trade, versus 167 basis points earlier in the day, but down from 175 basis points late Wednesday. The gap had recently stretched to about 190 basis points, the widest since 2004.
The gap between 30- and two-year Treasury yields had narrowed to 246 basis points from 256 late Wednesday.
In late morning trade, the benchmark 10-year note price -- which moves inversely to its yield -- was up 24/32, its yield easing to 3.80 percent from 3.85 percent before the data and 3.89 percent late Wednesday.
Two-year notes rose, erasing early losses. Their yields briefly dipped below 2%.
News that the number of workers applying for jobless aid last week fell to 349,000 from an upwardly revised 358,000 nearly matched economists' expectations and had little market impact.