Benchmark yield nears 5 percent mark

NEW YORK (CNNMoney.com) -- The yield on the 10-year Treasury moved closer to the widely watched 5 percent mark Tuesday, reaching its highest level so far this year, as a stronger-than-expected service sector reading added to recent speculation that the Federal Reserve will not cut interest rates this year.

The dollar fell against the euro and the yen.

The 10-year yield moved closer toward the 5 percent mark, climbing as high as 4.99 percent during the session, its highest level so far this year. The last time the 10-year yield finished above 5 percent was in August of 2006.

The benchmark was trading 13/32 lower, or $4.06 on a $1,000 note, to yield 4.98 percent Tuesday afternoon, up from 4.93 late Monday.

Short-term Treasury yields climbed to 5 percent for the first time in six months Tuesday, as the two-year note fell 2/32, or 63 cents, the first time it's reached this level since January.

The 30-year note fell 26/32, or $8.12 on a $1,000 note, to yield 5.07 percent, up from 5.03 in the previous session. Bond prices and yields move in opposite directions.

The five-year note lost 7 ticks to yield 4.96 percent.

The U.S. service sector grew at its fastest rate in a year in May, the Institute for Supply Management said in a report issued Tuesday. The services index rose to 59.7 during the month, beating forecasts for a decline to 55.3. A number above 50 indicates growth in the sector.

"It means that Fed policy will remain on hold and that outside of housing, the economy is still healthy," Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis told Reuters. "This is bearish for bonds."

The Fed has left interest rates unchanged at its past seven meetings. The minutes from its most recent meeting, in May, revealed that inflation remains its main concern but that the risk that the economy would decelerate abruptly has diminished.

The concern is that the economic growth will either become inflationary or force the Federal Reserve to boost interest rates later this year.

Treasurys pared earlier losses Tuesday after Federal Reserve Chairman Ben Bernanke said risks remain in the economy as growth may slow in the coming months.

However, speaking by satellite to a South African monetary conference, Bernanke said the housing sector adjustment is ongoing and the building slowdown would drag on growth longer than thought.

In currency trading, the euro bought $1.352, up from $1.3488 late Monday. The dollar bought ¥121.37, down from ¥121.79 in the previous session.

-- from staff and wire reports