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Bonds' hot rally is a fading memory as yields resurge

September 9, 2010 |  5:00 pm

Investors finally are getting a chance to buy U.S. Treasury bonds at better yields. But now they’re balking.

Interest rates on Treasuries surged across the board Thursday, in another sign that the summer’s huge rally in high-quality bonds has run out of gas.

Blame -- or thank -- the better-than-expected economic data of the last two weeks, which have caused some investors and traders to lose their appetite for government bonds as a haven against calamity. Or maybe interest rates just got so low investors no longer could stomach the idea of locking up their money at such paltry returns. A flood of new corporate bonds also is tempting buyers, at Treasuries' expense.

The annualized yield on the benchmark 10-year T-note jumped to 2.76% on Thursday, up from 2.65% on Wednesday and the highest closing level since Aug. 10.

The 10-year T-note yield (charted below) now is up 0.29 of a point from the 19-month low of 2.47% reached Aug. 31.

10yrsept9 To put that move in perspective, a bond yielding 2.76% pays almost 12% more annual interest than a bond yielding 2.47%. So the investors who picked up 10-year T-notes at 2.47% last week definitely are suffering buyer’s remorse.

Demand for Treasuries was sapped early Thursday by the government’s announcement that new claims for unemployment benefits fell to 451,000 last week, the lowest since the week ended July 9. That follows the report last week on August employment, which estimated that the economy lost a net 54,000 jobs last month, half the drop that analysts had expected.

The recent data “should help take some of the worst fears for the economy off the table near-term,” said Don Rissmiller, chief economist at Strategas Research Partners in New York.

As that sentiment filtered through the markets Thursday some investors pulled back from high-quality bonds -- just as the Treasury was auctioning $13 billion of new 30-year securities, the final leg of this week’s sales of $67 billion in longer-term Treasuries.

There still were plenty of takers for the new 30-year bonds, but not the number that Wall Street dealers were hoping to see. The bonds were sold at a yield of 3.82%, above expectations and up sharply from the recent low market yield of 3.51% on previously issued 30-year securities set on Aug. 26 (see chart below).

30yrsept9 “It looked like investors weren’t interested in the backup in yields,” said Tom DiGaloma, head of U.S. interest-rates trading at Guggenheim Securities in New York. “They just haven’t shown up.”

But he thinks buyers will jump back into the market soon, and before the 30-year bond nears the 4% level. The yield hasn’t been above that mark since Aug. 10.

“We still have a very slow economy,” DiGaloma said. And the Treasury market still has a special friend in the Federal Reserve, which last month resumed buying government bonds for its own account.

But bonds now may be at the mercy of the stock market, which rose Thursday for the sixth advance in the last seven sessions. If equities keep rallying on economic hopes, that could drain more money away from Treasuries -- a market that has racked up hefty capital gains over the last five months as yields have plunged and bond prices have surged.

-- Tom Petruno

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