Rates rise as bond rally runs out of steam on GDP data, Bernanke speech

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The Great Treasury Bond Rally of summer-2010 has stalled out after new data on the economy came in a bit better than the ugliest expectations -- and despite the possibility of more credit-easing moves by the Federal Reserve.

The yield on the 10-year T-note rose as high as 2.64% in midday trading Friday from 2.49% on Thursday. That 0.15-point rise may not look like a lot but it’s the biggest one-day jump since May 27.

Yields also rebounded on shorter-term Treasuries. The five-year T-note yield was at 1.48%, up from 1.38% on Thursday and the highest since Aug. 12.

Treasury rates have been plummeting with few interruptions this month as investors have rushed to lock in yields, reacting to deepening fears about the economy. Amid the euphoria for bonds, some traders have been warning that the market was overdue for some profit-taking that would cause at least a short-term backup in yields.

On Friday the government revised down its estimate of second-quarter gross domestic product growth to an annualized rate of 1.6% from the previous estimate of 2.4%. But the new figure was actually better than the 1.4% average estimate of economists surveyed by Bloomberg News.

That helped fuel a modest rally in stocks, siphoning some cash away from bonds. The Dow industrials were up 130 points, or 1.3%, to 10,116 at about 11:30 a.m. PDT. The Dow on Thursday had closed below 10,000 for the first time since July 6.

In his long-awaited speech on Friday, Fed Chairman Ben S. Bernanke said the central bank still expected the economy to grow in 2011, but he also reiterated the steps the Fed could take “if the economic outlook were to deteriorate further.”

Those steps could include more purchases of longer-term bonds, beyond the commitment the Fed made on Aug. 10 to resume buying Treasuries for its own account. That decision, an effort to push market interest rates lower, clearly has had the desired effect this month: The 10-year T-note yield has dived from 2.96% at the start of the month.

Still, Bernanke said that Fed policymakers have yet to agree “on specific criteria or triggers for further action.”

In other words, “The overall tone was one of watch and wait,” Goldman Sachs economists said in a note parsing Bernanke’s speech.

-- Tom Petruno