Bond market fires shot across U.S. bow

By Ben Rooney, staff reporter


NEW YORK (CNNMoney.com) -- Treasury prices drifted higher Friday as investors moved to take advantage of sharply higher yields following a lukewarm auction of $118 billion in U.S. notes earlier this week.

The benchmark 10-year note rose 9/32 to 98-6/32, pushing the yield down to 3.85%. Bond prices and yields move in opposite directions.

The 2-year note gained 2/32 to 99-29/32 with a yield of 1.06%. The 30-year bond rose 7/32 to 98-2/32 with a yield of 4.75%.

Despite the modest rebound on Friday, Treasurys are on track to post a weekly decline as investors fret about weakening demand for U.S. debt.

The yield on the 10-year note surged Thursday to a high above 3.9%, the highest level since June, after a sale of $32 billion worth of 7-year notes drew tepid demand.

Demand at this week's 2-year and 5-year note auctions was also lukewarm, which has raised speculation that a long-awaited boycott of U.S. debt could be near.

"The message from the bond market to Washington is loud and clear," said Mike Larson, an interest rate analyst at Weiss Research. "Get your fiscal house in order or we'll force you to do so."

Many analysts have been predicting that investors will eventually begin demanding higher yields, given the flood of Treasurys that has come to market over the last several months and the risks tied to the swelling U.S. budget deficit.

Until this week, demand for Treasurys had been relatively robust as investors flocked to the safety of U.S. debt amid the financial crisis.

More recently, demand had been supported by concerns about the fiscal crisis brewing in Europe, where debt-stricken countries such as Greece threaten to drag down economic activity across the region.

That healthy demand has been a boon for the U.S. government, which has been able to fund its activities and finance its debt at attractive rates. It has also helped stabilize the nation's fragile housing market, since mortgage rates are linked to Treasurys.

However, with policy makers in Europe moving this week toward an agreement on a deal to aid Greece if necessary, investors are turning their attention to the debt woes facing the Untied States.

"Now that the Greece situation looks like it could be resolved, the focus is shifting to the fairly ugly U.S. fiscal outlook," said Kim Rupert, a fixed-income analyst at Action Economics.

The U.S. is expected to sell over $1 trillion worth of Treasurys this year after selling a similar amount last year. The national debt, as a percentage of gross domestic product, is expected to hit 10% this fiscal year, according to Moody's Economy.com.

At the same time, investors have been moving away from Treasurys to take advantage of more attractive opportunities in the market for corporate bonds. At one point this week, yields on some corporate securities were trading below the yield on the benchmark 10-year Treasury note.

In addition, many analysts expect Treasury yields will continue pushing higher as the economy slowly recovers and investors grow more concerned about inflation. Rising prices can severely erode the value of fixed-income assets such as Treasurys.

"It's going to be a stop-and-go process, but we will see rates move higher," said Gus Faucher, director of macro economics at Moody's Economy.com. "If buyers of Treasurys are concerned that the government is not going to get its fiscal house in order, they will push rates up."

However, the nation's debt levels will eventually decline as the economy recovers, boosting tax revenues and reducing demand for social services, he said. And the Federal Reserve has tools to offset the impact of an increase in Treasury yields, he added.

Still, he cautioned that a rapid rise in Treasurys could have negative consequences for the broader economy.

"Rates will need to move higher, but you don't want it to happen too quickly and choke off the recovery," he said.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.25%4.27%
15 yr fixed3.23%3.21%
5/1 ARM3.37%3.37%
30 yr refi4.19%4.36%
15 yr refi3.18%3.17%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,047.85 68.72 0.40%
Nasdaq 4,527.21 0.73 0.02%
S&P 500 1,991.51 5.00 0.25%
Treasuries 2.42 -0.01 -0.37%
Data as of 12:50pm ET
Company Price Change % Change
Bank of America Corp... 15.85 0.33 2.13%
eBay Inc 55.95 2.55 4.78%
Hewlett-Packard Co 36.92 1.80 5.12%
Apple Inc 100.41 -0.16 -0.16%
Intel Corp 34.83 0.33 0.96%
Data as of 12:35pm ET

Sections

Russian officials have shut four McDonald's restaurants in Moscow, including the first to open in the city nearly 25 years ago at the end of the Cold War. More

Traffic lights are easy to hack, and they're unlikely to be fixed, according to computer researchers. More

This Canadian startup founder faced the threat of deportation because he was on the wrong visa. Problem is -- there's no startup visa for entrepreneurs. More

This month, Delaware became the first state to pass a law giving heirs the right to access the online accounts and assets of someone who has passed away. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.