Bond yields rising? Curb your enthusiasm

NEW YORK (CNNMoney.com) -- Happy days are here again? Not exactly. But if you look at what's going on the bond market, it might be fair to say that "less bad" days are here again.

The yield on the benchmark 10-year U.S. Treasury note is now hovering around 2.75%. Just a few weeks ago, it was as low as 2.42%.

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Ultra-low bond yields are often associated with economic malaise. Since prices and rates move in opposite directions, rates tumble when investors rush into Treasurys, since they are typically perceived to be relatively safe global investments even when the outlook for the U.S. economy is weak.

As such, many bond experts have been predicting lately that the 10-year yield could approach the record lows of 2.04% from December 2008. So it's somewhat comforting that long-term rates have recovered a bit and are edging back toward 3%.

The move has taken place following a series of slightly better-than-expected pieces of data about the economy in the past week. The latest jobless claims figures came in at a lower level than feared. And the trade gap in July narrowed significantly.

But it may be a mistake to get too excited. The recent spike in long-term rates may just be a blip.

After all, the Federal Reserve has signaled that it wants to keep rates super low to try and get the economy back on more solid footing. And the Fed is committed to buying more long-term Treasurys in order to achieve that goal.

Priya Misra, the widely respected rates strategist at Bank of America Merrill Lynch, wrote in a report last week that she thinks the yield on the 10-year may fall as low as 1.75% in the first quarter of 2011.

She cited the Fed's desire to "prevent a deflationary spiral by taking aggressive preemptive action" as a main reason why rates could head even lower.

But if rates remain this low for a prolonged period of time, it's hard not to interpret that as a sign of more than just an economic hiccup on the road to recovery. Instead, it may be evidence that the malaise will last for a long time.

That brings me back to the notion of "less bad." The fact that the economy no longer seemed on the abyss was the justification for much of the stock market's big rally from March of 2009 up until about April of this year.

The best that many bulls could say about the economy was that the recession was likely over and that the economy, while not strong, was not looking as terrible as it did in the fall of 2008.

That all changed this spring. Fears about the European debt crisis, the May 6 "flash crash," and more and more data showing that the recovery in the U.S. was losing steam began to make investors more nervous again.

"This recent economic soft patch is probably more than a soft patch. It's a delayed effect from the chaos in Europe. Consumers and businesses were worried it could be a replay of the fourth quarter of 2008," said Haag Sherman, managing director with Salient Partners, an investment firm in Houston.

Bears came out of the woodworks to once again proclaim that the economy was about to double dip. The gloomiest of the bunch declared that the recession that began in December 2007 never even ended. Scarier D words than double dip, such as deflation and depression, started to enter the conversation again.

The good news is that the pendulum seems to have swung away from these sourpusses for now. But again, that's not exactly something to truly celebrate.

"We are beginning to see rates attempt to normalize. Sentiment is moving from its most negative expectations of a double dip, but it's just back to the notion of this being a slower recovery," said John Stoltzfus, senior market strategist with Ticonderoga Securities in New York.

And here's the most troublesome thing. It will likely take a long time before the economy is fully recovered from the financial meltdown of two years ago. So while long-term rates may inch higher every now and then, they are likely to, for the most part, remain stuck below 3% for awhile.

"Next year will probably be similar to 2010," Sherman said. "You'll have periodic crises and bad economic data that will spook people and push Treasury yields back down. This phenomenon will happen over and over again for the next few years."

Great. Pass the Pepto-Bismol please.

We're going to Sizzler! Couldn't help but notice that HP, despite its best efforts to prove that there isn't a leadership vacuum, continues to disappoint Wall Street. HP announced its third post-Mark Hurd acquisition Monday but the stock was flat even though it was an up day for the market and tech sector.

That brought to mind the following movie quote, which I then challenged my Twitter followers to identify. "Sometimes when you win, you really lose. And sometimes when you lose, you really win."

JKang1217 is the winner. He? She? correctly pointed out that this gem was from "White Men Can't Jump." I hope that JKang1217 can hear Jimi.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, and Abbott Laboratories, La Monica does not own positions in any individual stocks.