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Bond buyers get nervous as economic gloom lifts a bit

September 2, 2010 | 12:21 pm

Where did all those insatiable bond buyers go?

Investor demand for U.S. Treasury securities and bonds of other major countries has hit a wall over the last two trading sessions, pushing interest rates higher, amid a flurry of better-than-expected economic data.

The 10-year T-note yield (charted below) was at 2.63% at about noon PDT on Thursday, up from 2.58% on Wednesday and up from the 19-month low of 2.47% set on Tuesday.

The plunge in U.S. bond yields that began in late April accelerated in August as many fearful investors sought a haven for their money, reacting to a barrage of data pointing to a weakening economy.

10ysept But some veteran bond strategists were warning last week that trading action in Treasuries had turned choppy, suggesting that the rally was running out of steam.

More important, economic reports over the last week have pointed to surprising strength, forcing some investors and traders to reconsider how negative they should be about the growth outlook.

Wednesday’s report on August manufacturing in the U.S. showed that activity expanded at a faster-than-expected pace. That helped trigger a big rally in the stock market, which siphoned some money from bonds.

On Thursday reports on August retail sales also came in stronger than Wall Street had anticipated, as did data on pending home sales and new claims for unemployment benefits.

The latest data “are consistent with the midsummer soft patch in growth being only temporary,” said Samuel Coffin, an economist at UBS in New York.

The rush into bonds had been a global affair in recent months, driving yields down sharply in Japan, Germany, Britain and many other countries. Now, the backup in yields also is global.

Japan’s 10-year government bond yield surged to 1.12% on Thursday, up from 1.03% on Wednesday and 0.97% on Tuesday.

Germany’s 10-year yield ended at 2.28% on Thursday, up from 2.22% on Wednesday and a record low of 2.12% on Tuesday, after the European Central Bank raised its forecast for euro-zone growth. The ECB said it expected economic growth in the range of 1.4% to 1.8% this year, up from its previous forecast of 0.7% to 1.3%.

The big test comes Friday, when investors get the report on U.S. employment trends in August. Economists’ average forecast is for a net loss of 103,000 jobs last month, according to Bloomberg News.

A smaller loss of jobs could stoke more optimism about the economy and raise more questions about how much lower interest rates can or should go in the near term. But a bigger loss could re-energize bond bulls -- who also know that they've got the Federal Reserve on their side.

-- Tom Petruno