Treasury prices plunged Thursday as a plan to defuse Europe's debt crisis drew traders into riskier investments.
The yield on the 10-year note hit a three-month high, signaling a broad turn away from ultra-safe Treasurys. A weak auction of seven-year Treasury notes confirmed that demand for U.S. government debt was dwindling.
European leaders agreed early Thursday on a plan to expand their regional bailout fund. Banks also agreed to take steep losses on the Greek bonds they hold. The plan postpones fears of a spreading financial crisis and buys the leaders more time to hammer out details.
Stocks rose sharply as Treasurys declined. The Dow Jones industrial average and Standard & Poor's 500 index jumped 2.9 percent and 3.4 percent, respectively. The S&P turned positive for 2011.
The price of the 10-year Treasury note dove $1.47 for every $100 invested, pushing its yield up to 2.39 percent at 4:30 p.m. Eastern time from 2.21 percent late Wednesday. It was the highest yield since Aug. 5.
The price of the 30-year Treasury bond plunged $4.13 per $100 invested. That pushed its yield up sharply, to 3.43 percent from 3.21 late Wednesday.
Traders of European government debt appeared less sure that the new plan will work. Many still fear that the debt woes will spread to Spain and Italy, whose economies are far larger than Greece's. Traders have sold Spanish and Italian debt in recent weeks, fearful that one of them would default. That pushed borrowing costs higher for those countries.
Traders bid up Italian debt early Thursday, pushing the five-year yield down to about 5.25 percent. But the yield quickly bounced back up to 5.50, just above the average over the past 10 days. Italy is paying more to borrow than it was at the start of last week.
European banks agreed to take 50 percent losses on the Greek debt they hold. They will be forced to increase their capital cushions to help them survive the market's swings. Europe also agreed to increase the lending power of its bailout fund by using the fund's $610 billion to insure bonds issued by weaker countries. The insurance is designed to keep borrowing costs down for Italy, Spain and others.
If borrowing costs for those nations continue to rise, the fund still might be too small to contain the debt crisis and prevent lending markets from freezing up, said Peter Tchir, who runs the hedge fund TF Market Advisors.
"This whole thing is really designed to make sure Spain and Italy do well," Tchir said. If Italy's yields stay high, that suggests traders were spooked by the 50 percent losses on Greek debt and no longer trust that Italy will repay them, he said.
Also Thursday, the Treasury Department sold $29 billion in seven-year notes at a yield of 1.791 percent. The yield for seven-year notes already trading on the market was 1.758 percent. The higher yield at the auction means bids came in lower than the prices of similar investments on the market. There also were fewer bids than at recent auctions.
In other trading, speculative-grade corporate bonds rallied with stocks as investors took on more risk. The Barclays Capital High Yield Bond Fund, which contains a package of relatively risky corporate bonds, leaped 1.7 percent. That means borrowing costs fell for companies such as CIT Group Inc., First Data Corp. and Caesar's Entertainment.
The yield on the 2-year Treasury note rose to 0.32 percent from 0.29 percent. The yield on the three-month Treasury bill fell to 0.01 percent from 0.02 percent. Its discount wasn't available.