Bond prices drop after Bernanke tempers expectations that the Fed will need to buy Treasurys

Investors flee Treasurys on Bernanke’s remarks

NEW YORK — Borrowers, take note: Interest rates may have found their bottom.

Investors pulled money out of Treasurys Friday after expectations faded that the Federal Reserve will need to buy bonds to stimulate the economy.

The yield on the 10-year Treasury note jumped to 2.65 percent in afternoon trading, up from 2.50 percent late Thursday. The price for the note maturing in August 2020 dropped to $99.781 from $101.25. Bond yields rise when their prices fall.

“The low in yields is done for a while,” said John Spinello, bond strategist at Jefferies & Co. “This was a pretty significant sell-off.”

The upturn in rates on the bond market could affect interest rates on auto loans and mortgages, which are currently lowest on record. The average rate for a 30-year fixed loan was 4.36 percent this week, the lowest since Freddie Mac began tracking rates in 1971.

Low rates have led to an increase in mortgage refinancing but have done little to budge home sales. High unemployment, slow job growth and tight credit standards have kept buyers on the sidelines.

While rates may continue to turn higher, they’re still very low by historic standards. Even after its move up today, the yield on the 10-year note is about where it was in March 2009, when the stock market was just emerging from 12-year lows and financial markets remained fearful.

Also, with markets still jittery, analysts say another dose of bad news on the economy might send investors seeking refuge in Treasurys again. Next week brings a number of key reports on the economy, and just one bad surprise could drive yields down again.

“Everything is so day-to-day,” said Greg McBride, a senior financial analyst at Bankrate.com. “Everyone is trying to divine if the next step is forward or back.”

On Friday, it was Fed Chief Ben Bernanke who quelled the bond party by saying the central bank will step in only if the economy deteriorates “significantly” and if signs of deflation appear. But Bernanke downplayed the threat of a double-dip recession and said he still expects the economy to grow next year.

Other economic news Friday made investors rethink their doom-and-gloom predictions.

The Commerce Department reported that second-quarter economic growth slowed, but not by as much as economists had forecast. Gross domestic product grew at a 1.6 percent rate in the April-to-June period, down from the government’s earlier estimate of 2.4 percent, the Commerce Department reported. That wasn’t as bad as the 1.4 percent expected by economists.

“So the economy is not falling off a cliff as much of the data released over the month suggested,” said Kim Rupert, managing director of global fixed income analysis at Action Economics.

Stocks have mainly fallen this month and bond yields have continued to decline after a series of poor indicators suggested the economy was running out of gas. Reports this week on plunging sales of both new and previously occupied homes delivered the latest blow to confidence in the economy.

The yield on the two-year notes maturing in August 2012 rose to 0.57 percent in Friday afternoon trading from 0.53 percent late Thursday. Its price fell to $99.625 from $99.688.

In other trading, the price on the 30-year bond that matures in August 2040 fell to $103.313 from $106.656, while its yield climbed to 3.69 percent from 3.51.

The yield on the three-month bill was steady at 0.14 percent. Its discount was also 0.14 percent.