Investors sold Treasuries for a second consecutive day on Wednesday, sending interest rates higher in response to the tentative deal to extend Bush-era tax cuts even as the Federal Reserve was trying aggressively to keep borrowing costs low.
The frenzy on the bond market was set off on Tuesday after President Obama announced his tax-cut agreement with Republican lawmakers. Financial markets interpreted the development as likely to hasten the economic recovery but also increase the budget deficit.
The deal on taxes, which would be paired with new cuts to payroll taxes and business taxes, effectively opened up a new channel to stimulate the economy with fiscal policy. At the same time, it appeared to run headlong into the Federal Reserve’s program, begun last month, to buy $600 billion in Treasury bonds in an effort to keep borrowing costs low and encourage spending by consumers and businesses.
Yields on the benchmark 10-year bond have been steadily rising since Oct. 7, when they were 2.39 percent.
On Tuesday, after President Obama’s announcement, yields shot up, and by Wednesday afternoon they were up 19 basis points from the day before, to 3.318 percent.
They retreated to 3.259 percent on Wednesday after the Treasury Department reported positive results from its $21 billion auction of new 10-year notes.
The yield on the 10-year note ended at 3.27 percent, the highest level since mid-June. The price tumbled again Wednesday, falling 1 5/32, to 94 17/32.
