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Bond yields jump again as economic outlook brightens

December 8, 2010 | 12:11 pm

The economy’s gain is the bond market’s pain.

Investors and traders continued to dump Treasury bonds on Wednesday, pushing yields sharply higher for a second straight session on growing expectations for a better economy in 2011.

The five-year T-note yield (charted below) has surged to a five-month high of 1.85%, up from 1.74% on Tuesday and 1.52% on Monday. That’s a massive move in the course of three days.

5yr Meanwhile, major U.S. stock indexes have edged up to new two-year highs, showing that some investors are leaving bonds for stocks -– a logical trade if you think the economy is looking up.

The Standard & Poor’s 500 index was up 3.73 points, or 0.3%, to 1,227.48 at about noon PST. If the S&P can hold that gain it would be the highest closing level since September 2008.

Another measure of the drastic turn in market sentiment toward bonds: The Treasury was forced to pay a yield of 3.34% on the $21 billion in new 10-year notes it sold on Wednesday, the highest yield on a new 10-year issue since May and well above the 2.64% yield on similar notes sold Nov. 9.

The 10-year yield also was up from 3.16% on Tuesday.

Longer-term bond yields have mostly been rising since early November, boosted in large part by growing  optimism about the economy. President Obama’s agreement this week to back Republican leaders’ demands to extend the 2001 and 2003 tax cuts further bolstered expectations for a stronger economy next year.

What’s more, the tax-cut extension is expected to mean more Treasury borrowing and a bigger federal deficit in 2011, which could put more upward pressure on bond yields.

Even with the Federal Reserve committed to buying $600 billion of Treasuries by mid-2011, the jump in yields shows the Fed can’t completely offset market forces.

Still, it looked like some investors were moving in from the sidelines Wednesday after the latest surge in yields.

The yield on previously issued 10-year T-notes had pulled back to 3.24% by about noon PST, or 0.10  percentage points below the yield on the newly issued notes.

Yields on shorter-term Treasuries also have edged down from their morning highs.

The market's next big test: The Treasury will auction $13 billion in 30-year bonds on Thursday.

-- Tom Petruno

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