Treasury debt prices rose sharply, as weak data on consumer confidence and a surprise profit drop at General Electric slammed the stock market and revived demand for low-risk government bonds.
A barometer on consumer sentimentfrom Reuters and the University of Michigan slid to a 26-year low in early April.
The worse-than-expected deterioration in consumer confidence, together with the disappointing GE news, undermined the view that a US recession, if it occurs, will be brief and that the crippling credit crisis might have passed.
"It confirms what we already know now, that we are in a consumer-led recession, and it's going to be a pretty protracted one," Carl Lantz, an interest rate strategist at Credit Suisse in New York, said of the consumer sentiment data.
Major stock indices fell more than 1 percent.
"Surprises like the GE earnings decline just add to the speculation that the U.S. economy has not bottomed, and there is a growing list of new variables which could force the Fed to stay in the easing mode a little while longer," said Kevin Giddis, managing director of fixed income trading with Morgan Keegan in Memphis, Tenn.
At the moment, traders see slightly more than a 50 percent chance the Federal Reserve will lower its fed funds target rate by half a percentage point at the end of April, up from about 40 percent a week ago.
The benchmark rate on overnight borrowing on surplus bank reserves is 2.25 percent after the Fed lowered it by a total of 3 percentage points in steps beginning last September.
On the other hand, government data showing an unexpected big jump in March import prices spurred worries that inflation has not cooled despite a deteriorating economy. This has kept a lid on long-dated Treasury prices, which are influenced by inflation expectations.
Still, Treasurys are poised to end with decent gains, led by shorter maturities, due to hopes of more Fed rate-cuts.
Two-year notes' price, which move inversely with their yield, traded up 6/32 at 100. Their yield slipped to 1.76 percent from 1.85 percent late Thursday and 1.82 percent a week ago.
Benchmark 10-year notes were up 22/32 at 100-8/32. Their yield was 3.47 percent, down from 3.55 percent late Thursday and unchanged from a week earlier.
The yield gap between two-year and 10-year notes grew to 171 basis points, the widest in nearly two weeks and unchanged from late Thursday. A week ago, this part of the yield curve was 165 basis points.