Treasury prices headed towards a weekly decline on Friday as investors absorbed the Fed's surprise move to raise its discount rate.

William Dudley, president of the N.Y. Fed Bank, echoed other Fed insiders that increasing the discount rate wasn't an impending signal of tightening in U.S. monetary policy, which would effectively raise interest rates.

Still Treasurys held a small gain late Friday, helped out earlier by a government report showing consumer prices were more tame than anticipated during January, easing one source of pressure that tends to push bond yields higher.

Yields on 2yr notes fell 1bpt to 0.92%. Yields on 10yr notes decreased by 2bps to 3.78%, after touching 3.83% during the session.

Treasury yields are on pace for big increases this week, in part as the market gears up for the government's sale of $126B in notes and inflation-indexed securities. The Treasury will sell $8B in 30yr inflation-linked debt on Monday, its first sale of that maturity. That will be followed by $44B in 2yr notes on Tues. and $42B in 5yr debt on Wed. The final auction of the week will be for $32B in 7yr notes on Thursday. The breakdown of the note sales matched the amounts sold last month.

Yields on 10yr notes have risen from 3.69%, making the biggest 2-week increase this yr.

Yields on 2yr notes are up from 0.83%, the biggest weekly increase this year.

Limiting the losses that began Thursday, analysts pointed to subsequent comments from Fed officials as trying to delineate between normalizing its functions, like the discount rate, and tightening monetary policy -- something that the officials said the central bank is far from doing.

Dudley also said that the U.S. economy is on the mend but will likely recover at a slower pace than experienced in recent quarters, a scenario that would tend to be supportive of government debt.

Earlier, bonds had briefly gained after the Labor Dept said consumer prices rose 0.2% last month, less than economists forecast. Core prices, excluding food and energy, unexpectedly fell 0.1%.

Late Thursday, the Fed raised the discount rate, to 0.75% from 0.50% previously, to encourage banks to borrow from the private market instead of the Fed.

The discount rate is now a half-percentage point above the fed-funds rate, which is the target overnight lending rate between banks and the rate more closely watched by markets and investors as an indication of monetary policy. The gap between the two rates was lowered from a full percentage point during the financial crisis to encourage struggling banks to use the so-called discount window.

St. Louis Fed chief James Bullard said later Thursday that speculation of an imminent hike in the Fed's target interest rate was "overblown," and an increase in the short-term federal funds rate remains far away. Separately, Dennis Lockhart, the president of the Atlanta Fed, said economic growth is likely to continue but may be feeble. With their remarks, Lockhart and Bullard "tried to calm fears about an imminent hike," said Bill O'Donnell, head of Treasury strategy at RBS Securities, in an email.