Another jump in Treasury bond yields lures buyers; Fed makes final purchases

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Just as the Federal Reserve is stepping away from the U.S. Treasury bond market, other investors are stepping back in Thursday -- evidently lured by the sharp rebound in yields this week.

The 10-year Treasury note yield rocketed to a seven-week high of 3.21% earlier in the day from 3.12% on Wednesday, as a report on Chicago-area manufacturing activity showed surprising strength in June.

That reinforced the idea that the economy’s spring “soft patch” could give way to stronger growth this summer, which could put upward pressure on interest rates.

But the T-note yield was back down to 3.15% by about 11:30 a.m. PDT as buyers returned.

The Fed, meanwhile, made its last bond buy under its “quantitative easing” economic-stimulus program launched last fall. The central bank has purchased $600 billion in Treasuries since November, an effort to suppress longer-term interest rates and pump money into the financial system.

The Fed’s final purchase Thursday was for $4.9 billion of bonds mainly maturing in six to seven years, according to CRT Capital Group.

The Treasury market has been in disarray all week. After reaching new lows for 2011 late last week, bond yields jumped as the government saw weaker-than-expected demand at auctions of two-year, five-year and seven-year notes on Monday, Tuesday and Wednesday, respectively.

Some of the dearth of demand reflects revived risk-taking, as investors shift back to stocks and commodities amid end-of-quarter portfolio shuffling. Fear that Greece would default on its debt has lessened as the nation’s parliament acted as expected Wednesday, approving austerity measures required as a precondition of further aid from the European Union.

But also on every bond owner’s mind is the question Pimco bond guru Bill Gross has been asking about Treasuries for the last few months, which he retweeted on Thursday: “Who will buy them now?” with the Fed gone as a major source of demand and the Treasury’s borrowing needs still massive.

The Fed won’t, however, be out of the market entirely: It will still be buying some bonds on a regular basis with proceeds from maturing debt in its $2.6-trillion securities portfolio.

-- Tom Petruno