Bond Bears Getting Bolder

Treasury prices slid Wednesday afternoon, pushing yields toward their March highs. Traders are wondering how much further there is to go.

The benchmark 10-year Treasury bond was recently down 8/32, while its yield, which moves inversely, rose to 4.57%, flirting with this year's highest close of 4.62% on March 28. Over the past seven months, a yield of 4.2% to 4.4% was deemed attractive enough for buyers. But rising inflation expectations and global competition from international bonds are making it harder for Treasuries to bounce.

Rising yields put some early pressure on the stock market, which also had to digest disappointing earnings overnight from Amazon.com (AMZN). Traders also were having trouble pushing the major indices above key resistance levels.

The S&P 500 was in particular focus after it failed to convincingly breach the 200-day moving average at 1199. The index was recently down 0.96 points, or 0.08%, at 1195.58. The Dow Jones Industrial Average was down 2.72 points, or 0.03%, at 10,375.15. The Nasdaq Composite was down 3.50 points, or 0.17%, at 2105.95.

For bonds, something has changed over the course of the year and, especially, in recent weeks, says BMO Nesbitt Burns interest rate strategist Michael Gregory. The BMO team believes that the benchmark 10-year yield will continue higher, rising to 4.70% over the coming months and to 4.90% by March 2006.

The yield has risen almost 20 basis points from 4.40% at Monday's open. The latest catalysts seemed to have been Monday's nomination of Ben Bernanke to replace Alan Greenspan as Federal Reserve chairman. Some believe Bernanke won't be as tough on inflation as Greenspan. Inflation erodes the value of fixed-income assets over time.

The slide in bond prices began in earnest early last month, when the yield still stood below 4%, as inflation jitters were revived by the spike in energy prices that followed hurricanes Katrina and Rita.