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Interest rates rise on further signs of growth

Interest rates rose on Monday in the bond market on fresh signs the US economy is continuing its slow, steady recovery.

business Updated: Apr 05, 2010 21:44 IST

Interest rates rose on Monday in the bond market on fresh signs the US economy is continuing its slow, steady recovery.

The yield on the 10-year Treasury note rose to its highest level since before the credit crisis erupted in late 2008. The yield is often used as a benchmark for consumer loans.

The 10-year note yield rose to 3.99 per cent, from 3.94 per cent during Friday's holiday-abbreviated trading session. The bond market closed early for Good Friday.

The price on the note maturing in February 2020 fell 12/32 to 97 2/32 in late morning trading.

Monday's yield on the 10-year note was its highest since October 2008 when it hit 4.09 per cent. That came just before the credit crisis peaked and investors bought up safe Treasurys, sending yields plummeting. The yield fell as low as 2.06 per cent by December 2008 before slowly starting to recover.

Treasury yields have been rising recently because of weak demand at new auctions and continued signs of economic growth. Yields typically rise and prices fall when the economy improves because investors will pull money out of safe, government-backed bonds and opt for riskier investments, like stocks, that have the potential for bigger returns.

Inflation also typically increases when the economy is strong, so Treasury yields and interest rates must move higher to keep pace. Monday brought two fresh signs of economic improvement that sent investors out of Treasurys and into stocks. A private trade group said the service sector grew in March at its fastest pace since 2007 and the National Association of Realtors' pending home sales index for February jumped more than expected.

The Institute for Supply Management's service sector index rose to 55.4 in March, from 53 in February. Any reading above 50 indicates growth in the sector, which covers about 80 per cent of the nation's work force and the majority of economic activity. Economists polled by Thomson Reuters forecast the index would rise to 54.

Meanwhile, the National Association of Realtors said its index of sales agreements rose 8.2 per cent to 97.6 in February. Economists had been predicting the index would fall to 90.3. In other trading, the yield on the two-year note that matures in March 2012 rose to 1.17 per cent from 1.11 per cent. Its price fell 3/32 to 99 21/32.

The yield on 30-year bond that matures in February 2040 rose to 4.83 per cent from 4.80 per cent. The price fell 13/32 to 96 25/32. The yield on the three-month T-bill that matures July 1 rose to 0.17 per cent from 0.16 per cent.