Tags: US | Credit | Markets

Interest Rates Rise as Investors Move Out of Bonds

Thursday, 27 May 2010 12:06 PM

Interest rates are rising in the bond market for a second day after investors gained more confidence about the debt situation in Europe.

China reassured investors Thursday by denying a report that it was considering reducing its holdings of European government bonds. A pullback by such a large investor might have spooked financial markets just as Europe appeared to be making progress on getting its fiscal affairs in order.

Investors moved into stocks at the expense of bonds.

There have been concerns for weeks that budget cuts in countries like Greece, Spain and Portugal to contain rising debt would upend an economic rebound. During weak economic periods, investors usually buy up safe investments, like U.S. Treasuries. The price of Treasuries had been steadily climbing, pushing yields and interest rates sharply lower.

Earlier this week, yields on both the 10-year note and 30-year bond fell to their lowest levels of the year.

However, the trend of rising prices and falling yields has reversed itself over the past couple of days following upbeat U.S. economic reports on Wednesday and China's comments Thursday.

The yield on the 10-year note, which is often used as a benchmark for consumer loans and mortgages, rose to 3.33 percent in midday trading, from 3.19 percent Wednesday. Its price fell $1.125 to $101.4375.

The drop in prices Thursday should help investors lock in higher yields at the government's upcoming auction for seven-year notes. The government is set to auction $31 billion of the notes.

Seven-year notes were reintroduced last year as the government issued more debt to help cover increased spending as it tried to stimulate the economy.

The yield on the seven-year note rose to 2.79 percent from 2.66 percent. Its price fell 81.25 cents to $102.0625.

In other trading, the yield on the two-year note rose to 0.88 percent from 0.82 percent. Its price dropped 12.5 cents to $99.75.

The price of the 30-year bond fell $2.03125 to $102.6875, pushing its yield up to 4.22 percent from 4.10 percent.

The yield on the three-year Treasury bill rose to 0.17 percent from 0.16 percent.

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