The improving economy propelled long-term interest rates higher for the third straight day on Tuesday, lifting a key bond market barometer to another record.
Treasury yields rose as their prices slumped in response to news that sales of existing homes surged last month. The report from the National Association of Realtors gave investors another incentive to keep buying riskier assets including stocks, and less reason to hold on to defensive investments like government debt.
The yield curve, the market measure that reflects the difference between the yields on two-year and 10-year Treasurys, widened further as investors sold longer-term bonds. Investors have been selling long-dated bonds in anticipation that a healthier economy will bring higher inflation, which undermines the value of fixed-income securities.
Meanwhile, two-year Treasurys suffered smaller losses, held up by expectations that the Federal Reserve will hold to its plans to keep short-term interest rates low for the time being. The disparate movements in Treasurys sent the gap between those rates up to 2.84 percentage points, from 2.81 Monday.
Some analysts said the current trend in the bond market reflects not only an improving economy but also a long-overdue pullback in Treasurys, which have been rallying in recent months and pushing long-term interest rates to very low levels.
"Long-term rates are getting back to some reasonable value," said Didi Weinblatt, vice president of mutual fund portfolios at USAA.
The price of the 10-year note fell 21/32 to 96 26/32 in light trading late Tuesday. Its yield rose to 3.76 percent _ its highest level since August _ from 3.68 percent late Monday. The yield was as low as 3.48 percent late last week.
The price of the two-year note fell 3/32 to 99 22/32, sending its yield up to 0.92 percent from 0.87 percent.
Trading was light as Christmas approached, and the low volume likely contributed to the big moves in bond prices and interest rates. The underlying trend in the market does seem to be toward a recognition that the economy is showing more signs of strength.
John Brady, a senior vice president of global interest rates at MF Global, said economic data including Tuesday's home sales report point toward further strengthening in the fourth quarter and early 2010. The National Association of Realtors said existing home sales rose 7.4 percent in November to a seasonally adjusted annual rate of 6.54 million, from a downwardly revised pace of 6.09 million in October. That was the highest level in almost three years.
Brady said the Fed won't even begin to consider raising rates until the second half of 2010, so the yield curve will probably steepen further, meaning a wider gap between short-term and long-term interest rates on the bond market.
A steeper yield curve would help the economy recover further and provide an extra boost to banks and other lenders, who will be able to continue borrowing money at low, short-term rates while lending money to customers at higher long-term rates. That increase in profit should help the battered sector offset loan losses that continue to pile up, Brady said.
In other trading, the 30-year bond fell 29/32 to 96 4/32. Its yield rose to 4.62 percent from 4.56 percent.
The yield on the three-month T-bill rose to 0.06 percent from 0.05 percent. Its discount rate was 0.07 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 _ remained at 0.2488 percent.