Bond yields crept higher Thursday after upbeat readings on jobless claims and factory orders sent positive signals about the economy.
The encouraging economic reports caused investors to demand higher yields on bonds. A healthier economy could lead to higher short-term interest rates as well as a greater likelihood of inflation — both of which are negative for bond holders.
The yield on the 10-year note rose to 3.80 percent from 3.75 percent late Wednesday, while its price fell 11/32 to 96 16/32. Interest rates on consumer loans are closely tied to bond yields, especially the 10-year Treasury note.
Douglas Kreps, managing director at Fort Pitt Capital Group, doesn't expect bond yields and interest rates to climb much in the near future since the economic recovery is still in its early stages. Kreps predicts bond yields and rates on loans such as mortgages could rise another 0.25 to 0.50 percentage points in early 2010, which would still be well below historic norms.
Mortgage finance company Freddie Mac said the average rate on a 30-year, fixed-rate mortgage was 5.05 percent this week, up from 4.94 percent last week. It was the first time rates rose above 5 percent since late October.
In economic news, the Labor Department said new claims for unemployment benefits fell to their lowest levels last week since September 2008, before the credit crisis peaked. New claims fell to 452,000, while economists polled by Thomson Reuters had forecast a smaller drop, to 470,000.
Durable goods orders excluding the volatile transportation sector jumped 2 percent last month, the Commerce Department reported, double what analysts were expecting. Durable goods are big-ticket manufactured items that last more than three years.
The Treasury market closed early because of the Christmas holiday. It will remained closed Friday.
In other trading, the yield on the three-month T-bill fell to 0.03 percent from 0.05 percent. Its discount was 0.04 percent.
Two-year notes fell 2/32 to 99 19/32, pushing their yield up to 0.97 percent from 0.94 percent
The price of the 30-year bond fell 1 1/32 to 95 5/32. Its yield rose to 4.68 percent from 4.61 percent.
The cost of borrowing between banks was unchanged. The British Bankers' Association said the rate on three-month loans in dollars — the London Interbank Offered Rate, or Libor — was flat at 0.2506 percent.
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