By Daniel Kruger 

U.S. government bonds rallied Friday, wrapping up a week in which tepid economic data and an apparent shift in the Federal Reserve's approach to inflation sent yields to their biggest weekly decline in more than a month.

The yield on the benchmark 10-year Treasury note fell to 2.931% from 2.981% on Thursday and 3.067% on May 18, notching its largest weekly slide since April 13. The yield on the two-year note, which is more sensitive to the direction of monetary policy, fell to 2.480% from 2.548% on May 18 -- its biggest one-week fall since Feb. 9 -- and down from 2.589% on May 16, which was its highest close since July 2008. Yields fall when bond prices rise.

Weak economic data, changing views of central bank policy and trade issues all contributed to drive yields lower in recent sessions. Yields fell Friday after the Commerce Department said that orders for durable goods -- products designed to last at least three years, such as computers and machinery -- declined 1.7% from the prior month to a seasonally adjusted $248.5 billion in April.

Yields had climbed to multiyear highs above 3% in 2018, lifted by hopes for economic growth, concerns about a pickup in inflation and tax cuts that have sparked a wave of borrowing that increased the supply of bonds in the market.

Now, some analysts said investors have new concerns about the risks facing the economy. President Donald Trump is pushing to impose new tariffs on auto imports, which could lead to slower growth by inviting retaliatory measures from Germany, Japan and South Korea. The U.S. Commerce Department launched a probe Wednesday into whether it could raise tariffs to up to 25% on auto imports on the basis of national security.

Other measures of U.S. manufacturing are sending signals of moderating growth. U.S. factory activity grew more slowly in April compared with earlier in the year, the Institute for Supply Management said this month. The trade group attributed the deceleration in part to uncertainty surrounding U.S. trade policy. The Federal Reserve's measure of manufacturing output advanced solidly in April, but after soft readings in three of the prior four months.

Yields fell below 3% on Thursday, a day after minutes from the Fed's latest meeting showed the central bank plans to stay on a gradual path of interest-rate increases even if inflation meets its target. The minutes also show officials are still unsure over the degree to which lower unemployment will fuel faster wage increases or firmer price pressures.

Muted inflation is good for the value of government bonds because it helps maintain the purchasing power of their fixed payments and can keep the Fed from raising interest rates.

Demand for Treasurys has also been bolstered by investors seeking to reduce risk in their portfolios after Mr. Trump's decision to cancel his planned summit with Kim Jong Un. The move has shifted the U.S. approach to North Korea away from a monthslong rapprochement and back to a campaign of military and economic pressure.

The gap between U.S. government bond yields and those in Italy, Spain, Portugal and Greece has widened as investors become increasingly concerned about growing risks in the European economy. Slowing growth and the rise of antiestablishment political parties in countries including Italy have raised questions about how soon growth can get back on track.

"We've got political uncertainty in Europe; we've got geopolitical concerns with Trump calling off his date with Kim Jong Un," said Ian Lyngen, head of U.S. government bond strategy at BMO Capital Markets. "The potential for international trade to be hurt by the administration's tariff tantrums is real."

Investors have pulled back on bets that the Fed will accelerate their expected pace of interest-rate tightening and lift them four times in 2018. Policy makers had penciled in three increases at their meeting in December and March.

Fed funds futures, which investors use to bet on Fed rate policy, late Friday indicated a 33% likelihood that the Fed will raise interest rate four times this year, down from 52% a week ago, according to data from CME Group.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

(END) Dow Jones Newswires

May 25, 2018 15:52 ET (19:52 GMT)

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