Treasury yields rise to highest since September

SAN FRANCISCO (MarketWatch) � Treasury prices dropped on Wednesday, pushing benchmark 10-year yields to their highest level in more than three months, on relief following a deal in Washington to extend lower income-tax rates for most Americans.

Yields on 10-year notes 10_YEAR �, which move inversely to prices, rose 8 basis points to 1.84%, after ending 2012 at the lowest yield in decades. That�s the highest level on a closing basis since mid-September. A basis point is one one-hundredth of a percentage point.

Click to Play Debt-ceiling fight still looms

The fiscal cliff deal leaves a host of issues unresolved, most glaring of which is the need for the U.S. to increase its borrowing limit. Photo: AP.

Yields on 30-year bonds 30_YEAR �advanced 9 basis points to 3.04%, adding to a big rise posted on Monday. Bond markets were closed Tuesday for New Year�s Day. See: Treasury yields end year at lowest in decades.

Long-bond yields last closed above 3% on Dec. 18, but otherwise haven�t topped that level since mid-October.

Five-year yields 5_YEAR �rose 3 basis points to 0.76%.

The deal passed by Congress raises tax rates on upper-level household incomes, extends unemployment benefits and delays across-the-board spending cuts for two months. It does nothing to address the U.S. borrowing limit, which was officially reached Monday, forcing the Treasury to take special measures to delay insolvency for the U.S. government. See: Fiscal-cliff deal passes Congress.

�This compromise will not solve the long-term debt and deficit problems facing the United States,� said Gary Thayer, chief macro strategist at Wells Fargo Advisors.

However, preventing a big tax increase will �likely keep the economy from falling into recession.�

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�Investor uncertainty is likely to persist while the administration and lawmakers deal with the debt and deficit issues in incremental steps rather than all at the same time,� Thayer added.

Still, bond yields could rise throughout the year, though remain �relatively low� by historical standards, he said. Ten-year notes may yield 2.50% by year-end, he said. See chart on U.S. interest rates since 1790.

The deal does more to ease uncertainty for individuals in terms of their tax rates, but leaves businesses unsure about how much federal spending or tightening to expect, noted Bill O�Donnell, a bond strategist at RBS Securities. See: Fiscal-cliff deal does little to tame debt ceiling, unemployment.

Analysts at the firm pointed out that yields sit near technical support levels, making it harder to rise further. More fundamentally, the slow growth outlook and continued Federal Reserve bond purchases are still expected to offer some demand for U.S. debt.

A partisan tussle over extending the debt limit in 2011 resulted in Standard & Poor�s downgrading the U.S. credit rating.

Reuters Enlarge Image President Barack Obama says he will sign the bill sent to him by Congress designed to avert the fiscal cliff.

�Unless reforms are implemented to balance the budget over the longer term, we will end up paying the cost eventually through higher interest rates as the ratings agencies once again weigh in,� said Ken Jaques, an analyst at Informa Global Markets. �A repeat of the contentious debating like we saw in 2011 will likely take us to the brink of a government shutdown and possible ratings downgrades as soon as next month.�

It�s expected to be a tough year for all U.S. bonds, though, as it is almost impossible to replicate the recent years� gains, investors said. See: Yield to global, short-term bond funds in 2013.

Even Bill Gross, who manages the world�s biggest bond fund at Pimco, forecasts bonds to return less than 5% in 2013, though he expects the same of stocks. Gold and unemployment will rise, while the dollar declines, he said on Twitter. However, Gross said that 5-year yields, seen by many analysts as a fulcrum between short- and long-term debt, will end 2013 at 0.70% � lower than where they sit currently. See: What Pimco�s Bill Gross sees gaining in 2013.