Treasurys gain on weak economic reports

NEW YORK (CNNMoney.com) -- Prices for U.S. Treasurys rose Thursday as investors flocked to the safety of government debt amid renewed concerns about the economy.

What prices are doing: The benchmark 10-year note was up 19/32 to 104-13/32 and its yield fell to 2.98% from 3.05% late Wednesday. Bond prices and yields move in opposite directions.

The 2-year note gained 1/32 to 100-2/32 and its yield was 0.61%, while the 5-year note rose 10/32 to 100-20/32 and yielded 1.75%.

The 30-year long bond jumped 1-6/32 to 107-1/32 with a yield of 3.97%.

What's moving the market: Concerns about a possible economic downturn in the second half of the year were heightened Thursday by weak manufacturing reports and a mixed reading on the labor market.

Manufacturing activity on the East Coast unexpectedly fell in June, according to reports from the Federal Reserve bank of New York and Philadelphia.

Separately, the Labor Department said the number of Americans filing new claims for unemployment fell last week to 429,000, the lowest level since August 2008.

However, the bigger-than-expected drop in weekly claims was largely a result of seasonal factors. And continuing claims, a measure of Americans who have been receiving benefits for a week or more, unexpectedly rose to 4,681,000 in the week.

Also supporting Treasurys, a measure of inflation at the wholesale level fell in June for the second month in a row.

The Producer Price Index (PPI) fell 0.5% in June after falling 0.3% in May. The core PPI, which strips out volatile food and energy prices, rose 0.1%, matching expectations.

The PPI report comes ahead of the closely watched Consumer Price Index, the government's main inflation gauge, which comes out Friday. Economists expect CPI fell 0.1% in June after a 0.2% dip the month before. Core CPI is forecast to remain unchanged at 0.1%.

Investors in the bond market pay close attention to inflation because rising prices can severely erode the value of fixed-income investments.

The cloudy economic reports came one day after the Federal Reserve lowered its forecast for GDP this year to a range of between 3% and 3.5% versus the previous forecast of a range of 3.2% to 3.7%.

The central bank also trimmed its inflation outlook, an indication that it is unlikely to raise its key interest rates any time soon. The Fed left its overnight lending rate close to 0% at the meeting, where it has been since December 2008.

What analysts are saying: "The Treasury market is trading higher this morning as the economic numbers continue to paint an ugly picture of growth," said Kevin Giddis, managing director of fixed-income at Morgan Keegan.

Giddis said in a research report that the current combination of weak economic growth and low inflation creates a favorable environment for Treasury prices to keep rising.

"The combination of this stretch of numbers and the Fed's new stance has taken the 2-year to a record low yield of .577%," he said.