Treasury Yields on Rise as Risk Fears Fade
Brightening Economic Outlook Has Investors Leaving the Safe Haven; 10-Year Note Likely to Test 4%

Treasurys are losing their appeal as a haven, with market participants expecting more selling pressure in coming weeks as the economic outlook brightens and the supply of debt rises.

The 10-year note's yield is likely to test 4% as soon as this week, a level last seen in early June, traders said.

"Many investors are leaving Treasurys," said Tony Crescenzi, portfolio manager at Pacific Investment Management Co. in Newport Beach, Calif. Some "buyers have decided that risk avoidance isn't as necessary as before."

Treasurys have handed investors a loss of 4.82% this year through Thursday after a gain of more than 10% in 2008, according to data from Barclays. Risky assets have performed better this year, with high-yield, high-risk corporate bonds gaining 40.5%, investment-grade corporate bonds up 12.3%, mortgage-backed securities returning 3.1% and municipal bonds gaining 8.4%.

The 10-year note's yield, at 3.852% late Friday, has increased by more than 1.8 percentage points from the historic low in mid-December, though the yield was more than 5% two years earlier. The 10-year yield could rise to 4.25% to 4.3% in the next two to three months if an economic recovery gathers strength, according to three traders. Bond yields move inversely to bond prices.

Rising yields are pushing up mortgage rates and the funding costs for the government, but higher yields may entice investors, including foreign central banks, to underwrite the Treasury auctions. The government is banking on foreign investors, who own more than half of the Treasury market, to fund its record budget shortfalls.

Traders noted that the higher 10-year yield bodes well for this week's $75 billion of note and bond sales, including $37 billion in three-year notes, $23 billion in 10-year notes and $15 billion in 30-year bonds.

"Foreign central banks would think the bond price is cheap" with the 10-year note's yield around 4%, said James Combias, head of Treasury trading at Mizuho Securities USA Inc. in New York.

After this week's monetary-policy meeting, the Fed is likely to acknowledge progress in the economic data while reaffirming its commitment to keep the federal-funds target rate near zero for a while, traders said.

More important, with the economy showing signs of healing, the Fed may be in a better position to engage in debate on strategies to unwind all the monetary stimulus once the economy recovers. This means the Fed is likely to refrain from expanding its $300 billion Treasury-buying program when it expires in September, traders said. The Fed has bought more than $240 billion in Treasurys since launching the program in March.

Write to Min Zeng at min.zeng@dowjones.com