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10-year yield hits 7-month high
Treasury prices fall, yields rise as traders foresee rate hikes into next year; dollar gains.
October 26, 2005: 4:35 PM EDT
Inflation watch
Fed leaders speak

NEW YORK (CNN/Money) - Treasury prices fell for the third straight session Wednesday, lifting the yield on the benchmark 10-year note to a seven-month high, as bond investors bet the Fed would keep raising short-term interest rates into next year.

At the same time, though, worries about the inflation-fighting credentials of Ben Bernanke, nominated by President Bush this week to succeed outgoing Fed chairman Alan Greenspan, have also weighed on the market.

The dollar gained against the euro and the yen.

The benchmark 10-year note sank 12/32 to 97-11/32 to yield 4.59 percent, up from 4.53 late Tuesday.

The yield on the benchmark 10-year note touched 4.61 percent during the session, its highest level since the end of March, and near its highest close for the year, 4.64 percent.

The 30-year bond lost 26/32 to 108-13/32 to yield 4.79 percent, up from 4.73 in the previous session. Bond prices and yields move in opposite directions.

In shorter-dated debt, the two-year fell one tick to yield 4.36 percent. The five-year note slipped 7/32 to yield 4.46 percent. Short-term yields are at four-year highs.

Treasuries have been selling off in recent weeks as traders expect the Fed to raise the federal fund rate -- the interest rate banks charge each other for overnight loans -- by a quarter-percentage point to 4 percent next week, and then further next year.

Traders are now betting the fed funds rate will go as high as 4.5 percent early next year. Just last month there was talk on Wall Street that the Fed would pause in its rate-hiking campaign to assess the short-term economic damage from hurricanes Katrina and Rita.

"This is important because the funds rate essentially represents the floor on yields for Treasuries with maturities of greater than two years," Tony Crescenzi, chief bond market strategist at Miller Tabak and Co., wrote in a research note.

Investors are loathe to invest in Treasury securities when they yield less than the fed funds rate, he wrote, adding that bonds may fall further if interest rates keep rising.

Meanwhile, investors are nervous about the nomination of Bernanke to succeed Greenspan at the helm of the nation's central bank.

Although Bernanke has said his priority as Fed chairman would be to maintain continuity with the policies established during Greenspan's tenure, traders are still wary of how well he will be able to fight inflation.

Inflation hurts bonds as it erodes the value of the fixed-income investment.

But rising rates generally help the dollar as they make dollar-denominated securities more attractive to foreign investors.

In currency trading, the euro bought $1.2064, down from $1.2108 in the previous session. The dollar bought 115.87, up from 115.03 late Tuesday.

The Fed has raised rates 11 times since the end of last June, bringing the fed funds rate to 3.75 percent.

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