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NEW YORK: Benchmark US Treasury yields tumbled to 20-month lows on Friday after US President Donald Trump said the United States would impose a tariff on Mexican goods, sparking broad risk aversion.

Trump said on Thursday there will be a 5% tariff on all goods coming from Mexico starting on June 10 until illegal immigration across the southern border is stopped.

Mexican President Andres Manuel Lopez Obrador urged Trump to back down from the tariff threats and said Foreign Minister Marcelo Ebrard would be in Washington to convince the US government that Trump's measures were in neither country's interest.

"It's more of the same, with a new set of tariffs on Mexico that's driving risk sentiment in the US That's probably what's behind the flight to quality we're seeing today," said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.

Yields have dropped this week amid concerns the escalating trade war between the US and China will harm international economic growth.

"The ramifications to global growth could be significant," Rajappa said.

Data from China on Friday added to these fears, with factory activity shrinking more than expected in May.

US data showed that consumer prices rose in April though price pressures remained tepid.

Benchmark 10-year yields dropped as low as 2.145 percent, the lowest since September 2017.

The inversion between three-month bills and 10-year notes expanded as far as 24 basis points, a signal that a recession is likely to follow in one to two years.

Fed Board of Governors Vice Chair Richard Clarida on Thursday touted the strength of the US economy but also noted that policymakers are ready to adjust policy if there are signs of a persistent shortfall in inflation or if other developments show risks to the economy.

Interest rate futures traders are now pricing in a 40% chance of a rate cut at the Fed's July meeting, up from 18% a week ago, according to the CME Group's FedWatch Tool. A cut by December is seen as 90% likely.

Copyright Reuters, 2019