Treasurys fell again Tuesday after inflation jumped more than expected last month. Year-end selling also pushed bond prices lower.
In late trading, the 10-year note fell 10/32 to 98 5/32, sending its yield up to 3.60 percent from 3.56 percent late Monday. The 10-year note is often used as a benchmark for interest rates on consumer loans.
The Producer Price Index, a measure of inflation at the wholesale level, jumped 1.8 percent in November, more than double what economists forecast. Core inflation excluding food and energy costs rose 0.5 percent, the biggest jump in more than a year.
Inflation spooks bond investors because it eats into the fixed returns on debt.
Mike Wallace, global market strategist at Action Economics, said the bond market will face a bigger test on Wednesday as the Consumer Price Index, which measures inflation at the retail level, is released, and as the Federal Reserve wraps up its two-day meeting.
If the CPI shows a similarly big jump as producer prices did Tuesday, the yield on the 10-year note could climb to 3.75 percent "in a heartbeat," Wallace said. The market is currently pricing bonds with the assumption that inflation will be benign, Wallace said, and any evidence to the contrary could send prices down and yields sharply higher.
It's widely expected the Fed will hold a key interest rate at a historically low level. However, if more data starts to point to inflationary pressures, the Fed might have to act sooner than later. The Fed has said in recent months that inflation is not a near-term concern.
The Fed uses interest-rate hikes to combat inflation. However, with the economy still struggling to recover, it must balance keeping rates low to spur a recovery with the potential for inflation.
Treasurys are also declining because of waning demand as the year ends, said Don Galante, senior vice president of fixed income at MF Global. Fund managers typically look to sell off holdings to lock in profits at the end of the year, he said.
Treasurys have mostly been falling since late last week after demand at auctions for 10-year notes and 30-year bonds was weak.
The price of the 30-year bond fell 22/32 to 97 16/32. Its yield rose to 4.53 percent from 4.49 percent.
In other trading, the price of the two-year note fell 1/32 to 99 24/32, while its yield rose to 0.87 percent from 0.86 percent.
The yield on the three-month T-bill was unchanged at 0.03 percent. Its discount rate was 0.04 percent.
The cost of borrowing between banks fell slightly. The British Bankers' Association said the rate on three-month loans in dollars _ the London Interbank Offered Rate, or Libor _ dropped to 0.2534 from 0.2538 percent.