Bond yields jump as Treasury note sale sees weak demand

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The Treasury is selling nearly $100 billion of notes this week, and it’s finding that a lot of potential buyers are busy with other things -- like holiday vacations.

The result is another surge in bond yields, heaping more misery on fixed-income investors already battered by the jump in interest rates since October.

Treasury market yields rose Tuesday after the government’s sale of $35 billion in new five-year notes drew weak demand. The annualized yield on the notes was 2.15%, the highest market yield on five-year securities since June and up from the rate of 2.04% on Monday on previously issued five-year notes.

“There was virtually no bright spot in what is likely one of the weakest five-year auctions in recent memory,” said George Goncalves, a bond strategist at Nomura Securities International in New York.

Wall Street dealers had to take 58% of the notes because of poor demand from institutional investors.

But does that dearth of demand say that investors believe that bond yields are going even higher in 2011 -- or is it just a function of the calendar, with so many market players gone this holiday week?

Bill O’Donnell, a debt strategist at RBS Securities in Stamford, Conn., thinks it’s more the latter. He says taxpayers are paying the price for the Treasury’s decision to sell bonds in “a market that is barely open,” given holiday absences on Wall Street.

Still, the Treasury’s $35-billion two-year note auction on Monday had gone well, raising hopes that buyers would turn out for the five-year sale as well.

The government wraps up its final debt auction of the year on Wednesday, when it will sell $29 billion in seven-year notes. Investors on Tuesday pushed the yield on existing seven-year notes to 2.88% from 2.72% on Monday.

Treasury yields have been rising sharply for the last two months, in part reacting to signs that the U.S. economy was gaining steam. The five-year T-note yield had bottomed at 1.03% on Nov. 4, which seems like an eternity ago for bond investors.

Two key economic reports Tuesday -- on October home prices and December consumer confidence -- were downbeat, which should have encouraged bond investors who believe that the economy’s momentum will fade in 2011 and that interest rates soon will drop again. But that sentiment didn’t register in the Treasury market.

For many bond mutual fund investors December can’t end soon enough: Rising market yields have depressed bond-fund share prices, leading to the steepest losses on the funds since the financial-system meltdown in the fall of 2008.

The Vanguard Total Bond Market exchange-traded fund fell 52 cents, or 0.6%, to $79.52 on Tuesday, the lowest share price since May. The fund’s “total return” -- principal change plus interest earnings -- is a negative 3.2% since Nov. 4, when the shares hit their all-time high.

-- Tom Petruno