Treasury debt prices rose Friday after a surprisingly weak sentiment reading reawakened fears that consumer spending could slide.
Earlier an apparent glimpse of hope in the crumbling housing market had dealt bonds a brief blow, but concern over the economy grew again with release of the confidence data.
Stocks also fell, adding to the bid for safe haven government bonds.
"The Treasury market right now has a very, very good bid," said John Spinello, Treasury bond strategist with Jefferies & Co. in New York. "The consumer confidence number accelerates concerns about spending, with markets somewhat ignoring the inflation expectations."
The Reuters/University of Michigan survey showed that consumer sentiment fell to its lowest in nearly three decades.
But inflation expectations within the report edged up. The longer maturities initially did not react, apparently on the view that soaring food and gasoline costs would mostly crimp economic activity. U.S. crude oil surgedto new records above $127 per barrel.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 7/32 for a yield of 3.79 percent, versus 3.82 percent late Thursday.
Bond traders reacted to signs of more weakness in non-farm payrolls in April based on a state-by-state breakdown of changes for last month the Bureau of Labor Statistics released on Friday. The perception the labor market was struggling more than previously thought drove more of a bid into bonds, analysts said.
Earlier, the biggest monthly jump in housing startsin two years hinted that the housing market might not be crumbling as much as expected, taking bond traders by surprise.
Yet analysts remained skeptical since this single report on breaking ground to build new homes might be an aberration and is unlikely to signal a bottom to the steady slide in house prices.
U.S. interest rate futures shifted slightly to increase the implied chance of a June interest rate cut. But futures still showed that most market participants expect a 25-basis-point rate hike for the end of the year.
The two-year Treasury note's price was up 1/32. The yield declined to 2.42 percent, compared with 2.43 percent late Thursday.
"We have noticed over the past couple of days that two-year yields above 2.50 percent have tended to draw in buyers," said Josh Stiles, bond strategist and managing director with research consultancy IDEAglobal in New York.
Short maturities respond closely to expectations for central bank interest rate moves.
"Some people think the Fed will be normalizing (rates) next year and that the neutral rate on fed funds would be around 4 percent, so there is some sense of vertigo down here if you believe that," said Stiles.
However, "The more important turnaround in housing has to come from prices and the pace of buying in housing rather than starting new houses," Stiles said. "This number is going back down in the coming months. It is not a great picture (for housing)."