Yields on U.S. government debt plummeted on Thursday in a sign of the bond market's growing nervousness about the overall strength of the economy ahead of Friday's nonfarm payrolls report for July.

The benchmark 10-year rate BX:TMUBMUSD10Y finished at its lowest level since Feb. 1 after Thursday's batch of data, which included weak manufacturing-sector activity for July and weekly jobless claims that jumped to an almost one-year high. Traders turned their attention to Friday's nonfarm payrolls report and the likelihood that it will show continued softness in the labor market.

When inflation is low and stable, Treasury yields are often seen as a sign of the bond-market's sentiment about the economic outlook, with higher rates on government debt reflecting growing optimism. However, yields have been plunging since late April as the result of a monthslong rally in government debt and a rising conviction that the Federal Reserve needs to start cutting interest rates from current levels of between 5.25% and 5.5%.

Thursday's plunge in yields is the result of "everything" going on in the economy right now, including a relatively weak manufacturing report from the Institute for Supply Management and initial jobless-benefit claims that came in higher than expected, according to Tom Graff, chief investment officer at Baltimore-based Facet, which oversees about $2.5 billion in assets.

In his view, the drop in yields is a reflection of "nervousness, not panic." The bond market is saying "not only is inflation coming down, which was already priced in, but that there might be some real economic weakness and that's a change in narrative," Graff said via phone on Thursday. "And that's why we're seeing rates drop in the long end. My take would be that it will take quite a material slowdown to get the 10-year yield down to 3.5%," though it's still possible.