In the span of a few weeks the yield on the 10-year Treasury bond has spiked to about 4.86%, an increase of about 0.2 percentage point during May, and up from a trough of 4.48% reached at the end of February. Analysts foresee the benchmark bond’s yield, which moves in the opposite direction of its price, pushing through 4.90%, the high for the year, and perhaps approaching 5% for the first time since August.

bonds_c_20070523153226.jpg
The 10-year note nears its 2007 high.

Though the movement in Treasury securities lies within the range established during 2007, some analysts are concerned that developments around the world, along with economic shifts in the U.S., could foretell further increases in interest rates. MarketBeat takes a look at what’s boosting yields at this time:

  1. Higher yields around the globe. Major central banks, such as the European Central Bank and the Bank of England, are in the process of adjusting their target rates higher, and that’s boosted the yields in other markets. The 10-year British gilt yielded 5.17% as of yesterday, while the 10-year German bund was yielding 4.36%, both highs for the year, and bonds in Canada and Australia were also at yearly highs. The U.S. long had higher yields than many other nations, which helped keep capital flocking to the country, but that advantage has faded.
  2. Expectations for rate cuts have diminished. The market’s anticipation of interest-rate cuts from the Federal Reserve, based on forecasts for slower economic growth, had inspired traders to keep yields low for months, but that outlook as changed. “We used to have three cuts priced in by the end of December, but now it’s about 50/50, slightly leaning in favor of a cut,” says William Hornbarger, chief fixed-income strategist at A.G. Edwards.
  3. China. The Chinese are seeking ways to diversify their $1.2 trillion in foreign reserves by pumping cash into hedge funds and alternative investments. But the latest Treasury International Capital System data show they’re still net purchasers of U.S. Treasurys. Buying U.S. bonds keeps the yuan’s appreciation slow and steady. If the country were to revalue the yuan more quickly (which still seems like a longshot), their Treasury purchases would slow, pushing yields higher, and imported Chinese goods would become more expensive, boosting inflation, putting still more upward pressure on rates.
  4. The economy suddenly doesn’t look so bad. After a weak first quarter of GDP growth (currently estimated at 1.3% annualized), the second quarter’s growth rate is expected to be about 2.9%, according to Macroeconomic Advisers. “There’s a little stronger growth, and at the same time, even though inflation has abated in terms of the core CPI, it’s important to keep in mind that it’s still running ahead of the Fed’s comfort zone,” says Joseph DiCenso, fixed-income strategist at Lehman Brothers.
  5. Technicals. Pushing through 4.90%, which is seen as a resistance level on the 10-year, would likely bring in the sellers. Mr. Hornbarger expects this to happen, saying “I think we’ll see 5% before this is all over.”