Housing starts dropped 2.6 percent to a seasonally adjusted annual rate of 1.17 million units, the Commerce Department said on Tuesday. That was the lowest level since last November and followed a downwardly revised rate of 1.20 million units in March.

"People had been anticipating continued strength in the housing market even with rising rates, based on the momentum from 2016," said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee.

"Traders and investors are going to be sensitive to any indication that there might be more rate sensitivity than people thought," Vogel added.

Benchmark 10-year notes  were last down 2/32 in price to yield 2.35 percent, down from 2.36 percent before the data.

The weak housing data came after a New York state manufacturing survey on Monday turned negative for the first time since October, and after weaker-than-expected US consumer inflation data for April on Friday.

Bucking the trend was other data on Tuesday showing that US factory output in April rose at its fastest clip in three years on a surge in auto production.

Ten-year US bond yields have largely held in a range between around 2.20 percent and 2.40 percent since March 22 as investors wait on further clarity on whether the Trump administration is likely to pass tax and fiscal overhauls this year.

The measures are expected to boost economic growth, making further interest rate increases more likely.

Futures traders have reduced expectations that the Fed will raise rates in June, though a rate increase that month is still viewed as likely.

Futures traders are pricing in a 74 percent chance of a June hike, down from 83 percent a week ago, according to the CME Group's FedWatch Tool.

The traders see only a 46 percent chance that two or more rate increases will be made by the Fed's December meeting, however, despite Fed officials repeating that they view two additional rate increases this year as likely.