NEW YORK - Treasury prices rallied Friday, pushing yields lower after news that new home sales hit a more than 12-year low in November, suggesting weak construction will reduce economic growth next year.

Signs of economic softness tend to stir safe-haven demand for government-backed Treasurys and other low-risk assets.

Treasurys bolted higher after the Commerce Department said purchases of new homes last month plunged 9 percent to an annual 647,000 pace. The Thomson/IFR forecast was for about 720,000 sales. The sales level was the weakest since April, 1995.

The shortfall was linked to a tough mortgage-writing environment and came despite aggressive price-cutting in many regions.

"Housing demand is unlikely to stabilize until homes prices stop dropping, but home prices are unlikely to stabilize until housing demand significantly reduces the inventory overhang," said Michael Gregory, a senior economist at BMO Capital Markets.

"This is a vicious circle that has pushed homebuilders' confidence to record 22-year lows in the fourth quarter, and points to a deepening housing downturn to start 2008," he said.

The 10-year benchmark Treasury note advanced 26/32 to close at 101 8/32 with a yield of 4.09 percent, down from 4.20 late Thursday. Prices and yields move in opposite directions.

The 30-year long bond shot up 1 21/32 to finish at 107 29/32 with a 4.51 percent yield, down from 4.62 percent late Thursday.

The 2-year note rose 4/32 to 100 7/32 with a yield of 3.12 percent, down from 3.21 percent the day before.

After hours trade moved some yields from their 3 p.m. Eastern time closing levels. At 5:30 p.m., the 10-year yield was 4.12 percent, the 30-year yield was 4.50 percent and the 2-year yield was 3.11 percent.

The 3-month yield rose to 3.18 percent from 3.12 percent Thursday as the discount rate increased to 3.10 percent from 3.04 percent.

Another report had positive portents for the economy, showing that manufacturing activity in the Midwest expanded this month. NAPM Chicago said its business barometer, the Chicago Purchasing Managers Index, stood at 56.6 in December, compared with the previous month's 52.9.

The result topped analysts' expectations for a second straight month. The index is seen as a precursor of the national manufacturing assessment to be issued by the Institute of Supply Management on Wednesday.

The prices paid category, a gauge of inflation, fell to 63.8 from 76.2, showing that price pressures fell from November levels. The Treasury market monitors inflation carefully because it cuts into the value of fixed-income.

Worries about the credit markets suffering a liquidity squeeze at year-end were lightened by news that London interbank lending, or LIBOR, rates for dollars, sterling and euros declined Friday, indicating that banks are more willing to lend to each other.

Lower premiums for the loans that banks make to each other signals that banks are not fearfully hoarding funds.The Federal Reserve and four other central banks have taken extraordinary actions to keep the global monetary system liquid and reassure consumers and banks as 2007 reaches its end.

Separately, investor Warren Buffett's Berkshire Hathaway fund Friday opened a new business, Berkshire Hathaway Assurance Corp, to provide guarantees and insure higher ratings for municipal bonds. The new business will give muncipal borrowers an alternative to struggling older bond insurers. This also should reassure investors and could spur higher issuance and buying n the municipal bond market.

Older bond funds like MBIA Inc., Ambac Financial Group Inc. and ACA Capital have come under strain. Last week, Standard & Poor's downgraded ACA to junk status, making it unlikely ACA will be able to insure any more bonds, until its rating improves.

And Fitch Ratings put Ambac Financial Group Inc. and MBIA on warning that the insurers must raise fresh capital or face downgrades. These problems raised concerns that municipal bond issuance could slow.