Treasury bond yields hit six-month high as investors balk

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Things got much worse today for investors who’ve been hiding out in ‘safe’ longer-term Treasury securities.

Yields have soared on T-bonds after investors demanded a higher-than-expected yield at the Treasury’s auction of $14 billion of new 30-year bonds, and as data on retail sales and unemployment benefit claims provided more evidence that the recession is easing.

The auction yield on the 30-year bonds was 4.29%, a six-month high and well above the 4.19% the market had anticipated.

Just four weeks ago the T-bond yield was 3.75%.

As rates on new bonds rise the effect is to depress the value of older bonds issued at lower rates. That has meant paper losses this year for many investors in Treasuries: The iShares Barclays 20+Year Treasury Bond fund, a popular exchange-traded fund, is down $2.15, or 2.2%, to $94.89 today. Year-to-date the share price has tumbled 20%.

Yields on longer-term Treasuries have been rising across the board this spring, which partly reflects growing optimism about the economy. Investors have been dumping low-yielding Treasuries in favor of riskier securities, including stocks and junk bonds.

At the same time, Uncle Sam’s borrowing needs continue to expand, flooding the market with new Treasury issues. The government sold $35 billion of three-year notes on Tuesday and $22 billion of 10-year notes on Wednesday.

How high is too high for Treasury yields? For the Obama administration, the big risk is that rising bond yields will push up mortgage rates, dealing a blow to the housing market.

So far, however, 30-year mortgage rates have continued to hold around 4.8% (as measured by Freddie Mac) for the last seven weeks -- even as the 10-year T-note yield, a benchmark for the mortgage market, has jumped from 2.76% to today’s 3.29%.

Tom Di Galoma, a veteran bond trader at Guggenheim Capital Markets in New York, said mortgage rates have been held down as many investors -- including the Federal Reserve -- have continued to buy mortgage-backed bonds, which still yield considerably more than government bonds.

As for Treasuries, Di Galoma said the market faces an acid test on Friday with the government’s report on April employment. Although he figures yields now have reached levels that should attract more investors, he said a stronger-than-expected employment report could fuel another exodus from Treasuries if investors bet that a second-half economic recovery is in the bag.

-- Tom Petruno