Long-term bond yields climbed sharply on today as improving sentiment on the economy sapped demand for government debt.
Long-term bond yields climbed sharply on today as improving sentiment on the economy sapped demand for government debt.
Several positive reports on the U.S. economy, higher oil prices and a resurging stock market helped send Treasury prices back down again, resuming a sell-off that began late last month.
Demand for Treasurys had already been waning in recent weeks on concerns about a flood of U.S. government debt coming to the market as Washington finances its massive financial and economic stimulus programs.
The yield on the 10-year Treasury note, a widely used benchmark for home mortgages and other kinds of loans, jumped to 3.70 percent from 3.46 percent late Friday as its price fell 1 28/32 to 95 8/32. Last Wednesday the yield on the 10-year bond hit a six-month high of 3.75 percent.
Bond prices had recovered late last week following solid demand for debt at several Treasury auctions, but could not hold on to their gains Monday amid the upbeat economic data, a sinking dollar and higher oil prices.
A weaker dollar and higher oil prices are especially worrisome for the bond market because they signal the potential for inflation, which would erode the value of a bond's fixed returns over time.
Meanwhile, stocks rallied on Wall Street on positive reports on manufacturing, construction and consumer spending, which further pressured Treasury prices. As investors' appetite for risk increases, stocks and other riskier assets become more appealing than government bonds, which are usually seen as safe-haven investments.
Among the positive economic data out Monday was a report showing that the decline in U.S. manufacturing slowed in May; consumer spending dipped less than expected in April and construction spending rose. Other positive news on manufacturing in China and Europe helped to overshadow General Motors Corp.'s filing for bankruptcy on Monday, which had been expected.
Many analysts believe rising bond yields are a natural progression when the economy is on the mend. However, there is also the fear that a huge spike in yields, which are a benchmark for interest rates on mortgages and other consumer loans, could curb purchases of homes, cars and other big-ticket items and undermine an economic recovery.
"One of the big risks here if rates move higher too quickly is the Federal Reserve will be a victim of its own success," said Ira Jersey, head of U.S. interest rate strategy at RBC Capital Markets. "The advantages of fiscal stimulus will start to dissipate. As that occurs you have risk again that rates go up."
The yield on the 30-year bond jumped to 4.54 percent from 4.34 percent as its price fell 3 2/32 to 95 10/32.
The yield on the two-year note rose to 0.98 percent from 0.93 percent, as its price fell 3/32 to 99 25/32.
The yield on the three-month Treasury bill dipped to 0.11 percent from 0.13 percent.
The cost of borrowing between banks fell to another record low. The British Bankers' Association said the rate on three-month loans in dollars — known as the London Interbank Offered Rate, or Libor — fell 0.01 of a percentage point to 0.65 percent. The rate has been steadily falling for most of the past month on hopes that the worst of the recession is over.
