The U.S. Treasury market rallied Thursday after disappointing data on growth and jobs renewed concerns about the economy, leading investors to favor low-risk government bonds over stocks.
Adding to those worries were signs of unevenness in manufacturing, where a weak dollar has spurred export demand.
If that sector falters, it could make the economy contract, which last happened in the last quarter of 2007.
"Bonds are picking up here with the stock market leaking lower," said Steve Point, lead portfolio manager at Glenmede Investment Management in Philadelphia.
Bond gains were capped as the stock market pared earlier losses on a rebound in Nasdaq shares and a drop in oil near $124 a barrel.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, was up 20/32 for a yield of 3.97 percent, the lowest in almost two weeks and down from 4.05 percent late Wednesday.
The two-year Treasury note was up 7/32 for a yield of 2.53 percent. down from 2.64 percent late Wednesday.
The government's initial reading on second-quarter gross domestic product, its broadest measure of economic activity, came in at an annualized 1.9 percent rate, faster than the 0.9 percent first-quarter pace but slower than the 2.0 percent median forecast of analysts surveyed by Reuters.
The fourth-quarter GDP figure showed a modest 0.2 percent contraction in the economy versus an earlier reported 0.6 percent growth. The government also downgraded its GDP readings from 2005 to 2007.
"So it looks like the economy was closer to recession than the previous data indicated," said Gary Thayer, senior economist at Wachovia Securities in St. Louis. (A panel of experts assembled by CNBC discusses today's economic data in video at left.)
Sluggish Job Sector
A day before the release of its monthly payroll report, the U.S. Labor Department said jobless claims surged to 448,000 last weekfrom a revised 404,000 in the prior week. Analysts polled by Reuters had predicted a figure of 395,000.
The department said some states experienced more filings from people seeking benefits under the 2008 Emergency Unemployment Compensation program.
"The trend is definitely negative for the labor market," said Glenmede's Point. "This could have a great impact on consumer spending."
The consumer sector accounts for more than two-thirds of the U.S. economy.
Earlier, job recruitment firm Monster Worldwide said its online labor index fell sharply in July.
Job conditions could worsen as companies struggle with a pullback in consumer spending, tight credit and fallout from the housing slump, according to analysts.
The National Association of Purchasing Management-New York said its local business gauge fell in July and its outlook gauge plummeted.
In contrast, business activity data from Chicago NAPM, the Institute for Supply Management-Milwaukee, and Kansas City Federal Reserve showed surprising regional growth in July.
However, the data did not alter the market's view of anemic U.S. growth in the months ahead and the Fed leaving benchmark interest rates steady at least up to year-end.
Five-year Treasurys were up 16/32 in price for a yield of 3.26 percent, down from 3.37 percent late Wednesday, while the 30-year bond was up 31/32 to yield 4.59 percent, down from 4.65 percent late Wednesday.