Treasury yields rose Wednesday after encouraging economic news drew money into higher-risk investments.
Orders for U.S. manufactured goods rose sharply in July, lifted by a surge in demand for autos and strong orders for commercial aircraft. Overall factory orders climbed 2.4 percent, the largest increase since March.
The rebound by automakers sowed hope among investors that manufacturers are recovering after a soft patch this spring and summer. Many factories slowed production because of supply chain interruptions related to the earthquake and tsunami that hit Japan in March. When they failed to bounce back quickly, many feared that the economic recovery was losing momentum.
Stocks rose on the brighter economic outlook Wednesday, drawing money away from lower-risk, low-return Treasurys.
The yield on the benchmark 10-year Treasury note rose to 2.23 percent from 2.18 percent late Tuesday. Its price fell 50 cents for every $100 invested. Bond yields rise as their prices fall.
Treasury yields declined sharply this month as demand for U.S. government debt increased. The yield on the 10-year note fell below 2 percent for the first time Aug. 18. It fell more than half a percentage point this month.
The rally came despite a downgrade of U.S. debt by Standard & Poor's. S&P blamed political wrangling over raising the nation's borrowing limit.
Analysts said the move by S&P failed to deter traders because there are no comparable low-risk investments that are easy to buy and sell.
"Treasurys are the only game in town, the only alternative" for traders seeking to protect their money against a downturn, said Kim Rupert, managing director at Action Economics LLC. Traders took the S&P downgrade with "more than a grain of salt," she said, in part because the other two major rating agencies still have a top rating on U.S. debt.
Treasury prices fell on Wednesday in part because some investment funds were rebalancing their portfolios to match indexes of U.S. sovereign debt. Certain funds promise investors the same returns as bond indexes that track a basket of Treasurys. The funds often wait until the end of the month to adjust to any changes in the market. The buying spree can boost demand for Treasurys at month's end, Rupert said.
Traders snapped up Treasurys this spring to protect their assets as uncertainty spread about the outlook for the global economy. Higher-risk investments such as stocks declined for much of the month, at times swinging wildly between gains and losses.
The volatile trading was driven in part by fears about Europe's debt crisis. Banks there hold unknown amounts of debt issued by cash-strapped nations such as Greece, Ireland and Portugal. All three have needed financial lifelines from their neighbors. A default by one nation that uses the euro could also hurt other the economies of other nations that use the currency.
In the U.S., the Federal Reserve acknowledged this month that the economic recovery is weaker than it had expected. It announced a plan to keep short-term rates near zero for the next two years. That effectively capped yields for shorter-term Treasurys. Traders seeking higher returns were forced to buy longer-dated securities.
Hope is growing among traders that the Fed will launch another round of bond purchases after its September meeting. By boosting demand for Treasurys, the Fed can push yields even lower. One aim is to maintain ultra-low rates on consumer loans. Another is to give investors an incentive to move money into higher-risk investments such as stocks.
Traders have bought up Treasurys in anticipation of a possible move by the Fed, said Ian Lyngen, senior government bond strategist with CRT Capital Group LLC. "The market thinks that's increasingly likely," he said.
The price of the 30-year bond fell $1.81 for every $100 invested. Its yield rose to 3.61 percent from 3.52 percent late Tuesday.
The yield of the 2-year note was flat at 0.20.
The yield on the three-month T-bill was 0.01 percent. Its discount wasn't available.