NEW YORK (AP) - It's been a tough week for bond investors.
Bonds extended their slump on Friday, after a report showed the U.S. employers added 280,000 workers to their payrolls in May. That was more jobs than forecast and suggests that the economy is back on track after starting the year in a slump.
The yield on the 10-year Treasury note climbed to an eight-month high of 2.43 percent, directly after the report was published. That's 0.31 percentage points higher than it was at the start of the week, a big move in the Treasury market.
Traders are speculating that the Federal Reserve will raise its benchmark interest rate later this year, for the first time since the recession as the economy maintains its recovery. Bond yields typically climb when investors are expecting higher rates.
The jobs report "will certainly keep rates moving higher," said Kathy Jones, Vice President, Fixed Income Strategist, Schwab Center for Financial Research.
She expects the yield on the 10-year note to climb as high as 2.5 percent in coming weeks if reports continue to show that the economy is recovering from its sluggish start to the year.
The level of Treasury bond yields matters to most Americans because they used as a benchmark for a range of borrowing costs, such as on mortgages.
Long-term U.S. mortgage rates have already started to creep higher, meaning consumers will have to pay slightly higher interest payments when borrowing. The average rate on a 30-year fixed mortgage was 3.84 percent in May, compared with a rate of 3.67 percent in January, according to mortgage company Freddie Mac.
That shift equates to an increase of $9 a month for every $100,000 in mortgage debt. Still, mortgage rates remain low compared to historical averages. A decade ago the rate on a 30-year mortgage was 5.58 percent.
To be sure, few investors are expecting a huge jump in yields simply because inflation remains so low. Overall consumer prices edged up 0.1 percent in April, the Labor Department said last month, but overall they are still down from 12 months ago after a big drop in energy prices.
"We're not thinking that yields are going to run away from us here," said Marc Doss, regional chief investment officer for Wells Fargo Private Bank. "The big move has occurred and now it will be more gradual."
Doss said that investors globally had become too pessimistic on the outlook for the world economy and had rushed to buy bonds. The surge in buying had pushed the yield on the 10-year note as low as 1.65 percent by the end of January.
At one point, prices on some European government bonds had risen so high that they carried a negative yield. Instead of getting an interest payment, traders were paying borrowers to take their money.
Bonds yields in the U.S. are also much higher than they are in other parts of the world. For example, the yield on the 10-year German government bond is 0.85 percent. In Japan it is 0.48 percent. That means that U.S. Treasury notes are still attractive to overseas investors who are seeking an income, ensuring demand for the securities.
Investors also say that the move higher in yields is also being exacerbated by a dearth of traders willing to step in and buy when prices are falling.
Banks and other middlemen have been pulling back from this matchmaking since the financial crisis because of new regulations limiting their activities. They have largely abandoned their role as a buyer or seller of last resort and have slashed amounts of bonds that the hold on their books for trading.
And it's not just bond yields that are slumping.
Utilities have also been falling sharply as bonds have sold off.
At the start of the year, investors seeking an income bought the dividend-rich stocks as an alternative to bonds. Now that bond yields are rising, the sector looks less attractive by comparison. Utilities dropped 1.3 percent on Friday and are now down 10.3 percent to the year, making them the worst performing sector in the Standard & Poor's 500 index this year.
Real Estate Investment Trusts, popular for the same reason as utilities are also slumping.
During week bond yields climbed steadily throughout the week as investors sold. Yields even rose on days when there weren't any big economic reports.
That's unusual said Schwab's Jones.
"We've seen a lot of these big moves in a day and people just have to get used to the idea that this is the new bond market," said Jones.