Treasury Yields at Highs for the Year

More evidence of tight labor markets and strong import growth greets a market where most of the buyers have gone home.
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Treasury yields backed up to their highest levels of the year today after a brace of bearish economic reports hit a market in the process of shutting down for the year. There were simply not enough buyers, analysts said, to keep prices from collapsing when anyone wanted to sell.

Also, a second consecutive large rise in oil prices helped send a key commodity price index sharply higher, adding to the bearish tone in the bond market, which in on track to have its worst year since 1994.

The benchmark 30-year Treasury bond -- which may well have its worst year ever -- finished the day down 28/32 at 96 14/32, lifting its yield 6 basis points to 6.39%. The previous closing high yield of the year was 6.37% on Oct. 26.

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Intraday, the long bond traded down as much as a full point, lifting its yield to 6.40%. The intraday high for the year is 6.41% on Oct. 25.

Shorter-maturity Treasury notes also made new closing high yields for the year. The 10-year note ended the day down 15/32 in price at 6.30%. The five-year note dropped 10/32, lifting its yield to 6.20%. And the two-year note fell 4/32, its yield climbing to 6.15%.

The market got off to a bad start because of a rout in the European bond market. Most European yields rose by 15 to 18 basis points today after the German

Ifo Business Climate Index, released at 4 a.m. EST, printed much stronger than expected -- 98.9 in November, up from 96.1 in October.

Then, when the U.S. markets opened, traders were greeted by the news that the

Labor Department's

weekly tally of

initial jobless claims had sunk to a 26-year low of 266,000.

With the

Fed perceived to be focusing most closely on indicators of labor-market tightness in its deliberations on whether to hike the

fed funds rate, this was unwelcome.

The day's other main economic indicator -- the October

international trade report -- had mixed implications. It was weaker than expected; the trade deficit, which had been expected to narrow slightly to $24.3 billion, instead widened to $25.9 billion, a new record.

On the one hand, a larger trade deficit will weigh on the fourth-quarter economic growth rate. Bond traders like that because the Fed is seeking slower growth so that inflation does not accelerate. On the other hand, the deficit rose because import growth outpaced export growth by a large margin, and import growth signifies strong demand from U.S. consumers, the main driving force of the economy.

Meanwhile, crude oil futures for January delivery rose to $26.83 a barrel on the

New York Mercantile Exchange

, up from $26.36 yesterday and their highest close since Nov. 24. Over the last two sessions, crude futures are up 4.3%. Data released Tuesday evening showed that pre-Y2K stocking-up by consumers is sharply depressing inventories.

The surge in energy prices helped drive the

Bridge/Commodity Research Bureau Index

up 1.3% over the last two sessions to 205.16, the highest since Nov. 17. Rising commodity prices make bond investors fear inflation more broadly.

On top of all that, very few people want to buy bonds these days, market analysts said. If they haven't closed their books on the year, they are unwilling to take the risk that the Fed, when it holds its last meeting of the year on Tuesday, will release a statement indicating that it might be necessary to hike the fed funds rate more than once next year.

"Investors have become less and less involved in the bond market because of Y2K,"

Paribas Capital Markets

bond strategist Ken Fan said. The highest yields of the year might be expected to attract buyers, he added, but with tech stocks on a tear, "there's no reason to own the bond."

"The focus,"

Morgan Stanley Dean Witter

chief U.S. economist Richard Berner said, "is on what the Fed says after its meeting on Dec. 21." While unlikely to hike the fed funds rate so soon before the Y2K date change, Berner says the Fed will probably release a statement indicating that additional rate hikes are likely next year.

"The market is discounting a lot of bad news, so if we get anything good here, we could see a rally," Berner said. "It has pretty much priced in 25 basis points in February, if not more down the road. But if we start pricing in more than one hike, it becomes an environment that continues to erode away bond investor confidence."