Bond Yields Leap; Oil Hits Seven-Week High

Treasury bond yields shot to multiyear highs Tuesday after investors found themselves too optimistic, yet again, about an end to the Federal Reserve’s credit-tightening campaign.

A jump in oil prices to seven-week highs, above $66 a barrel, also hurt bonds by fanning inflation worries.

Stocks fell, with the Dow industrials dropping 95.57 points, or 0.9%, to 11,154.54. Losses in the broader market were relatively modest, however. Analysts noted that what’s bad for interest rates -- a healthy economy -- generally is bullish for stocks.

The Fed, under new Chairman Ben S. Bernanke, raised its key short-term interest rate to 4.75% from 4.5%, as expected.

But policymakers’ statement accompanying the move sounded more upbeat about the economy than many bond investors would have preferred. That signaled that at least one more rate hike was coming, analysts said.

“There’s no question they’re going to 5%,” said Andrew Brenner, head of global fixed-income investing for Hapoalim Securities in New York.

Treasury bond yields had pulled back in recent weeks as some economic data suggested that a slowdown was underway. But the Fed’s optimistic tone Tuesday, and a report showing U.S. consumer confidence at nearly a four-year high this month, belied the slowdown concerns.

The Fed also warned about potential inflation pressures, and another surge in oil prices underscored that threat. Near-term crude futures in New York soared $1.91 to $66.07 a barrel, the highest since Feb. 1. Recent militant attacks on Nigerian oil facilities have raised new fears about global supplies.

In the bond market, the 10-year T-note yield, a benchmark for mortgages, jumped from 4.7% on Monday to 4.78% on Tuesday, the highest since June 2004.

Yields on shorter-term Treasuries, such as six-month and two-year issues, rose to their highest levels since 2001. The two-year T-note ended at 4.79%, up from 4.72% on Monday. Yields rise as bonds’ prices fall.

Many bond investors over the last year have repeatedly bet that rates were peaking, only to see the Fed tighten further.

Treasury yields probably will go higher in the near term with the market now expecting a 5% Fed rate, some analysts said. Peter Hooper, an economist at Deutsche Bank Securities in New York, said he expected the 10-year T-note yield to top 5%.

Rising foreign bond yields could put upward pressure on U.S. yields, Hooper said. Bond rates in Germany jumped Tuesday after an index of business confidence there reached a 15-year high.

On Wall Street, stocks were up slightly in Tuesday’s session until the Fed’s announcement. The news triggered an immediate sell-off, and losers outnumbered winners by about 2 to 1 on the New York Stock Exchange.

But the Dow bore the brunt of the decline. Among broader indexes, the Standard & Poor’s 500 index fell 8.38 points, or 0.6%, to 1,293.23. The Nasdaq composite slipped 11.12 points, or 0.5%, to 2,304.46.

Kevin Caron, market strategist at Ryan, Beck & Co. in Florham Park, N.J., noted that stocks had rallied this year despite higher interest rates, as the strong economy had bolstered hopes for rising corporate earnings. The Dow is up 4.1% year to date; Nasdaq is up 4.5%.

“What the signals are here and abroad are that the global economy is still doing well despite these rate hikes,” Caron said. “This is a recipe that works for stocks.”