BOND REPORT: Ten-year Treasury Yield Hits 10-month High

By Saumya Vaishampayan, MarketWatch

NEW YORK (MarketWatch) -- Treasurys fell Tuesday, pushing yields on the 10-year note to their highest since April 12, after data showed that home-builder sentiment was weaker than forecast and ahead of the Federal Open Market Committee's minutes release Wednesday.

Yields on the benchmark 10-year U.S. Treasury note (10_YEAR) rose 2 basis points to 2.03%. Yields move inversely to prices, and one basis point is one one-hundredth of a percentage point.

"The big likely driver, if there is one, is probably going to be the FOMC minutes coming out tomorrow," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co.

Minutes from the January meeting are expected to shed light on when and how the Fed may halt the bond-buying program. The FOMC minutes released in January showed that "several" Federal Reserve officials thought the bank could slow or stop the program before December 2013.

For yields on the 10-year note to rise above the 2% level in the longer term, the market needs to see further evidence that the Federal Reserve is heading toward an exit strategy, Wilkinson said.

"Until that point, there's probably a lid on yields on 2% without further evidence that the economy is strengthening," said Wilkinson.

Yields on the 30-year bond (30_YEAR) rose 3 basis points to 3.21% and yields on the 5-year note (5_YEAR) rose 2 basis points to 0.89%.

Large speculators "aggressively" bought 2-year notes, according to a weekly hedge-fund note released Tuesday by Bank of America Merrill Lynch.

Large speculators also recently moved out a crowded long, or extremely bullish, position in 10-year Treasury notes, said Stephen Suttmeier, U.S. technical analyst at Bank of America Merrill Lynch.

If 10-year yields follow the seasonal bias from January to April and push "decisively" above 2%, yields could go as high as 2.3% to 2.5% in April or May, he said.

The National Association of Home Builders/Wells Fargo housing market index, a gauge of U.S. residential builders' confidence, declined in February for the first time since April, data showed Tuesday. The index fell to 46 from 47 in January, compared with analyst expectations of 48.

"Overall, a soft report, but given the recent string of gains, it is difficult to argue that the reading is a disappointment, rather more of a pause," Ian Lyngen, senior government-bond strategist at CRT Capital Group, wrote in a note.

Germany's ZEW indicator of economic sentiment rose to 48.2 from its previous reading of 31.5 in January, surpassing analyst expectations of 35.0. The index measures future expectations and the upbeat data pushed European stocks up.

The German data boosted optimism that the euro zone's economic recovery is likely to be stronger in six months, according Wilkinson. "We're seeing slightly lower German bund yields, calm in the peripheral markets. In that environment, there's nothing worrying Treasury investors either."

Yields on the 10-year German bund were unchanged at 1.62%, and yields on the German 5-year fell 1 basis point to 0.63%.

U.S. stocks continued their upward climb as investor sentiment was buoyed by talk about a merger between Office Depot Inc. (ODP) and OfficeMax Inc. (OMX). The Standard & Poor's 500 Index hit a five-year high. .

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