US Treasury prices rose on Friday as the latest figures confirmed a second-quarter slowdown in the pace of economic growth and manufacturing data painted a mixed picture of the future.
The numbers did nothing to alter expectations that the Federal Reserve will continue to raise interest rates at a measured but steady clip.
Bonds marched higher for the first time this week as a more subdued expansion in gross domestic product in the April to June period confirmed economists' suspicions that a pullback in consumer spending had restrained growth.
Data on factories in the Chicago area pointed to a considerable increase in production for July but also showed a decline in manufacturers' willingness to hire.
That cast doubt on the Fed's contention that more moderate job creation during June was a temporary aberration. It also suggested that next week's key payrolls report could prove weaker than analysts had expected, boosting Treasuries.
"It reinforces the view that the Fed can hike interest rates at a measured pace," said David Ging, fixed-income strategist at Credit Suisse First Boston in New York.
The central bank's favoured measure of inflation, the core personal consumption expenditures index, pulled back to 1.8 percent after being revised up sharply to 2.1 percent in the first quarter.
"That gives the Fed a little more breathing room," added Ging.
Reflecting the market's relief, the benchmark 10-year note climbed 26/32 in price, recovering some of the heavy losses suffered early in the week, when the market was betting on strong data. Yields slid to 4.48 percent from 4.58 percent. Yields on the two-year note dropped to 2.69 percent from 2.77 percent late Thursday.
The five-year note rose 14/32, taking its yield to 3.69 percent from 3.79 percent.
At the long end, 30-year bonds gained 1-13/32, lowering yields to 5.20 percent from 5.30 percent.
The Chicago purchasing management index of business activity bounced to 64.7 in July after a dip to 56.4 in June, handily beating forecasts of a rise to 59.0. However, the employment index surprised many by slumping to a one-year low of 45.6 and prices paid pulled back from recent highs.
The New York purchasing management also reported another jump in the activity index in July, though this survey is considered of only secondary importance by analysts.
Looking back in time, gross domestic product rose at an annualised 3.0 percent rate in the second quarter, though growth in the previous quarter was revised up to 4.5 percent. The surprise came in consumption, which rose only 1.0 percent, its lowest reading in 3 years. Much of that weakness was due to high energy prices swallowing up more of each dollar spent. The data reinforced analysts' expectations that the Fed would keep tightening at a gradual pace, though that still means rates could hit 2.25 percent by year-end.
"So far, the July statistics have been reasonably healthy. Next week we get the ISM (Institute for Supply Management manufacturing index) and payrolls, both of which will give you a sense of where the third quarter is starting.
Our sense is that the third quarter started on a good note," said Ram Bhagavatula, chief economist at RBS Financial Markets in New York. Terror concerns also resurfaced after a blast rocked the US embassy in Tashkent, Uzbekistan, encouraging a safe-haven bid favouring bonds ahead of the weekend.
A fresh rise in oil prices offered some support to bonds. While higher energy costs can feed inflation, they are also seen as a tax on consumption and a drag on both economic growth and equity prices. As such, they could give the Fed pause in its plans to steadily raise interest rates.
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