10-year yield at 4% snarls recovery

Treasury yields are soaring. Mortgage rates are following. And the spike in interest rates threatens to upset the recovery party.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Catherine Clifford, CNNMoney.com staff writer

Bailout tracker
Follow the money: Bailout tracker
The government is engaged in a far-reaching - and expensive - effort to rescue the economy. Here's how you can keep tabs on the bailouts. More
Are you cutting back on spending due to rising energy prices?
  • Yes
  • No

NEW YORK (CNNMoney.com) -- The 10-year Treasury yield soared to 4% for the second day in a row Thursday - before backing off later in the session -- heightening inflation fears and threatening to upset the nascent signs of an economic recovery.

Just six months ago, the yield on the 10-year note hovered around the 2% level, as investors opted to park money in government-backed debt rather than higher risk equities.

The bond market typically takes a back seat to the stock market, which offers higher rewards but also higher risk. As the economy slogged through the recession, investors have remained cautious and plugged into bonds.

Prior to Wednesday, the benchmark yield had not reached 4% since mid-October. But Wall Street's tectonic plates have started to shift.

The Dow Jones industrial average has surged 30% since hitting its 12-year low on March 9. Investors have been shrugging off bad economic news and seeing 'less bad' news as good news. As investors grow more optimistic about the "green shoots" of recovery, the bunker trade into the Treasury market has waned.

And historically, a 10-year yield at 4% is low. "Getting back over 4% is just one step in the right direction," said said William Larkin, portfolio manager at Cabot Money Management. "It is a sign that the economy is recovering and that people are starting to look at the other side."

The sharp drop off in debt prices is also a result of the massive amount of supply hitting the market. The government has been spending at a breakneck pace and has been selling an unprecedented amount of debt to finance its rescue efforts.

Housing. Rising interest rates have been pulling the rug out from a housing recovery.

The 30-year fixed mortgage rate moves in tandem with the benchmark 10-year Treasury yield, which has been on a tear. Mortgage rates hit 5.95% last week, according to a Bankrate.com's most recent national survey.

To try to keep a cap on mortgage rates, the Federal Reserve unveiled a program in mid-March to buy back $300 billion of its own debt. The so-called quantitative easing program was launched to jolt the Treasury market with demand, boost prices. The program worked for a while: Mortgage rates fell and refinancings surged.

But the benefits of the Fed's program were short-lived. And the debt buyback program is beginning to look a lot like the government using a soup ladle to keep a river from overflowing its banks.

Just this week, the government had three auctions lined up to sell $65 billion in debt: $35 billion of 3-year notes were sold Tuesday, $19 billion in a reopening of the 10-year note was sold Wednesday and $11 billion in the reopening of a 30-year bond hit the block Thursday.

Waning support. Other countries have started to doubt the creditworthiness of the U.S. Russia and China have both indicated that they are concerned about the unsustainable pace of spending. Russia said Wednesday it would consider shifting assets to other safe havens, like International Monetary Fund bonds.

"Longer term, the concern over foreign interest is a wake up call to Congress and the president," said Nick Kalivas, vice president of financial research at MF Global, in a daily research note. "The idea that the IMF bond is getting attention is a sign of investor worry over the U.S. fiscal situation."

What's next? With inflation fears rising and an economy still breathing on the lifeline of the government, the future of the bond market is murky. Some investors are looking for the Fed to try to increase its commitment to the debt buyback program. The Federal Open Market Committee is slated to meet June 23 and 24.

"There are some people speculating that they will expand their Treasury buyback program," said Craig Ziegler, managing director of Broadpoint Securities Group. "But I just don't know how much that helps when you are still issuing $150 billion in Treasurys in a month, not including bills."

Going forward, Larkin expects there will be more conversations about being fiscally conservative. When the rhetoric changes, that will help other foreign central banks feel more confident in U.S. debt, he said.

While Larkin does not expect the Fed to hike rates any time soon, he does expect the Fed to use aggressive language in coming statements to hint to the market that a rate hike is coming. "They are going to try to change the expectation so people can get used to the change."

Debt prices. Bond prices had been lower early in the day, sending yields soaring, but prices rallied into the 30-year bond auction. After a healthy auction, with nearly $30 billion bid for $11 billion in debt sold, the longbond led a charge forward, adding to earlier gains.

The 30-year bond rallied 1-29/32 to 92-22/32, and its yield fell to 4.25%. Earlier in the session, the long bond yield reached 4.83%.

The benchmark 10-year note rose 21/32 to 93-31/32, and its yield dipped to 3.86%. Earlier in the session, the benchmark Treasury touched 4%. Bond prices and yields move in opposite directions.

The 2-year note rose 3/32 to 99-6/32 and its yield dipped to 1.33%. The yield on the 3-month note held steady at 0.18%.

Lending rates. One key bank-to-bank rate continued to move lower. The 3-month Libor edged to 0.63% from 0.64% the day prior, according to Bloomberg.com.

The overnight Libor rate held steady at 0.26%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money. The closely-watched benchmark is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor. To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.