U.S. Treasurys were flat Friday after mixed economic data did not change expectations of a Federal Reserve interest rate cut next week.
But the data reduced the chances of half a percentage point cut in the Fed funds rate target at the central bank's policy meeting on Tuesday. A 25 basis-point reduction, now anticipated by the market, would be the first monetary easing in four years.
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"Markets have already priced in a 25 basis points cut on Tuesday. The stock market is liking it and the bond market is saying we don't have to take yields down too low at this point," said Joe Balestrino, fixed income strategist at Federated Investors in Pittsburgh, Penn.
Government bond prices had earlier risen, tapping a flight-to-quality bid triggered by news that the Bank of England had offered an emergency loan to mortgage lender Northern Rock.
Stocks, recouping opening losses, dragged Treasurys lower during the volatile session. Stocks closed slightly higher.
Benchmark 10-year notes were unchanged in price for a yield of 4.47 percent, versus 4.47 percent late on Thursday.
Two-year notes slipped 1/32 in price to yield 4.05 percent from 4.03 percent.
Bonds had rallied after an unexpected drop in August nonfarm payrolls last Friday raised optimism that the central bank could lower the fed funds rates by as much as 50 basis points to 4.75 percent.
"There is a slow, but steady unwind of the panic conditions that reached their height in the middle of August amid the credit seize up that was due to concerns over defaults in the subprime debt sector," said David Dietze, chief investment strategist at Point View Financial Services in Summit, N.J.
"Investors are slowly backing away from Treasurys to take advantage of better yields in spread products."
August retail sales showed signs of weakness, while industrial production recorded an unexpectedly small rise.
However, the Reuters/University of Michigan consumer sentiment gauge surprisingly inched up in September.
Analysts said sales data carried more weight than confidence as they indicated what consumers were doing.
"When you add today's numbers to last Friday's weak employment data, it is hard to continue to bang the strong economy drum too loudly," said Kevin Giddis, head of fixed income trading at Morgan Keegan in Morgan Keegan in Memphis, Tenn.
"Today's figures give the Fed the breathing room it needs to ease for economic reasons rather than Wall Street ones."
The 30-year long bond was unchanged in price to yield 4.73 percent, versus 4.73 percent late Thursday.
Five-year notes were flat, yielding 4.18 percent.
Treasury volume was around $282.17 billion, below the 20-day moving average of $312.06, according to ICAP.
Two-year interest rate swap spreads contracted sharply to 69.75 basis points from 72.25 basis points late on Thursday.
Ten-year spreads widened to 67.25 basis points from 65.50 basis points.
"Further improvements of the liquidity situation in the interbank market will likely cause short-dated swap spreads to fall further," said RBS Greenwich Capital's Fidelio Tata in a note.