I See the Bond Yields Rising

The bond market has been acting pretty crazy recently, as I noted last week. Since the early November lows, two-year Treasury yields have risen about 56 basis points, while 10-year yields are up about 78 basis points. Let's examine why it's behaving this way and what it likely means for the economy.

Earlier this week The Wall Street Journal looked at some factors in the mortgage market that are influencing yields. The end of the dealers' fiscal year in November is also probably hurting Treasuries. As dealers rebuild their corporate bond inventories and bring more deals to market, they'll often short Treasuries in an attempt to hedge their market risk.

However, these are merely contributing factors. Bond managers' belief that the economy or inflation is about to come roaring back has primarily driven the recent yield rise. After bonds have had a decent year, especially in the short maturities, the temptation may also be coming to lock in profits before institutions' fiscal year-end this month. ...