Tags: US | Credit | Markets

Interest Rates Surge as Europe Launches Bailout

Monday, 10 May 2010 03:35 PM

Interest rates surged in the bond market Monday after European leaders and central banks around the world agreed to rescue measures to help stem growing debt problems in Europe.

European Union leaders and the International Monetary Fund agreed to a nearly $1 trillion aid package that will help weak European countries like Greece that are struggling with debt. The U.S. Federal Reserve is also making loans available to central banks in Europe that can then loan the money out to financial institutions in their countries.

Central banks from England, Switzerland and Japan also said they would make money available as part of the swap program.

The programs brought relief to investors that had been worried a Greek debt crisis could spread and further undermine the euro, which is used by 16 European countries.

With the rescue package in place, investors dived back into riskier assets like stocks at the expense of safe investments like U.S. Treasury bonds.

The yield on the 10-year Treasury note that matures in February 2020 rose to 3.55 percent in morning trading from 3.43 percent from late Friday. Its price fell 93.75 cents to $100.625. Bond yields rise when their prices fall.

The yield on the 10-year note is often used as a benchmark for setting interest rates on consumer loans and mortgages.

Interest rates tumbled last week as traders retreated to safe investments like U.S. government bonds.

The rise in rates and drop in Treasury prices also comes ahead of $78 billion in auctions this week for three-year and 10-year notes, as well as 30-year bonds. The government is selling $38 billion in three-year notes on Tuesday, $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on Thursday.

Treasury yields could climb further before the auctions, analysts say.

"It wouldn't surprise me one bit," if yields rose in the next couple of days, said Matt Hastings, a portfolio manager at Charles Schwab Investment Management. Investors will often drive prices lower and yields higher heading into auctions just to improve returns on new debt being issued.

Hastings said the yield on the 10-year note would have to rise to between 3.65 percent and 3.75 percent just to make it into the range that has been seen at auctions for 10-year notes already auctioned this year.

In other trading, the yield on the 2-year note that matures in April 2012 rose to 0.86 percent from 0.83 percent, while its price fell 6.25 cents to $100.25.

The yield on the 5-year note that matures in April 2015 rose to 2.26 percent from 2.17 percent. Its price fell 37.5 cents to $101.125.

The yield on the 30-year bond that matures in February 2040 rose to 4.42 percent from 4.28 percent. Its price fell $2.3125 to $103.40625.

The yield on the three-month Treasury bill that matures August 12 rose to 0.15 percent from 0.12 percent.

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