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Treasury bond yields jump as U.S. economy improves and Europeans signal rate hike

March 3, 2011 | 12:55 pm

The stock market’s joy Thursday is the government-bond market’s horror.

U.S. Treasury bond yields took their biggest jump in three weeks amid robust economic reports and after the European Central Bank signaled that it was poised to begin raising short-term interest rates.

The 10-year T-note yield was at 3.57% at about 12:45 p.m. PST, up from 3.47% on Wednesday. The two-year T-note yield was at 0.78%, up from 0.69%.

Upbeat data on unemployment benefit claims, retail sales and service-sector activity fueled new hopes that the economy’s recovery was gaining momentum. That encouraged some big investors to sell bonds in favor of stocks.

Trichet The Dow Jones industrial average was up 205 points, or 1.7%, to 12,271 with a few minutes to go in the trading session.

More disturbing for some bond investors was European Central Bank President Jean-Claude Trichet’s warning that the bank might raise its benchmark short-term interest rate at next month’s meeting to combat inflation. The ECB’s rate now is 1%.

Like the U.S. Federal Reserve, the ECB has kept short rates near rock-bottom for the last two years to repair the financial system and underpin the economic recovery.

But unlike the Fed, which believes record-low rates still are warranted, the ECB is fearful of upward pressure on inflation from higher food and energy prices. The ECB has one mandate, which is to control inflation.

Trichet’s warning triggered a heavy sell-off in European government bonds, pushing yields up sharply and bond prices down.

The yield on two-year German government notes soared to 1.77%, up from 1.54% on Wednesday and the highest since late 2008.

Ten-year German bond yields surged to 3.33% from 3.20%.

Rising foreign bond yields could make it more difficult for the Fed to hold down U.S. Treasury yields, which the central bank is trying to do with its ongoing government-bond purchase program. Those purchases are scheduled to end in June.

-- Tom Petruno

Photo: European Central Bank President Jean-Claude Trichet. Credit: Hannelore Foerster / Bloomberg News