Treasury yields hit highest in over a month

SAN FRANCISCO (MarketWatch) � Treasury prices extended losses on Monday, pushing yields up for the fourth session in five, as signs of progress by U.S. lawmakers in addressing tax and spending changes offered markets some relief.

Bonds lost ground starting during the Asian session, with the dollar gaining against the yen after the results of Japan�s weekend election pointed toward more easy monetary policy.

Yields on 10-year notes 10_YEAR , which move inversely to prices, rose 6 basis points to 1.77%. They haven�t closed above that level since late October.

A basis point is one one-hundredth of a percentage point.

Click to Play Abe�s return sends yen tumbling

A day after Japan's general election, Shinzo Abe's plan to launch a stimulus to get Japan's economy on track sent the yen lower. The market is looking for changes in the country's monetary policy.

Thirty-year yields 30_YEAR �added 7 basis points to 2.94%, the highest since late October.

Yields on 5-year notes 5_YEAR �increased 4 basis points to 0.73%, their highest since just before the presidential election in early November.

Analysts also noted signs progress in Washington to address a slate of billions in tax and spending measures set to expire at year-end. They�ve been referred to as the fiscal cliff because if they all take effect, economists widely expect the U.S. to fall back into a recession. See: Hopes rise for pre-Christmas fiscal cliff deal.

/quotes/zigman/4868283/delayed 10_YEAR 1.79, +0.01, +0.73% 10-year yields On the rise.

The uncertainty surrounding the country�s fiscal policy has supported bonds. Reversing that means the outlook is boosting equities and �turning more negative for bonds,� said TD Securities strategist Richard Gilhooly. �Fiscal cliff negotiations appear to have now started in earnest, as each side has apparently conceded some ground.�

It would be nice to have some kind of deal or framework before lawmakers leave for the holidays, said bond strategists at RBS securities.

�At this point it seems any deal that emerges before year-end will only represent a watered-down version of a larger agreement to be reached in 2013 that more specifically addresses tax and entitlement reform,� they wrote in a note.

The Japanese yen USDJPY �and Treasury rates tend to be closely correlated, as Japan is one of the biggest buyers and holders of Treasurys. Yields tend to rise in concert with the dollar versus the yen because it becomes more expensive for Japanese investors to buy U.S. debt. See: Dollar gains on yen after Japan�s election.

�The correlation between a weaker yen and higher Treasury yields reflects fundamental factors, such as reflationary measures in Japan and less willingness or need to buy Treasury paper at a higher dollar exchange rate,� Gilhooly said.

Auction on tap

The Treasury Department sold $35 billion 2-year notes 2_YEAR , at 0.245%, the lowest level since July. See more on 2-year note results.

/quotes/zigman/4868354/delayed 2_YEAR 0.26, -0.0040, -1.50% Two-year yields

It was the first of four note and inflation-indexed debt sales this week. See recent Treasury auction results.

Analysts expected the auction to go smoothly, as a major source of pressure on short-term rates is about to come to a close: the Federal Reserve�s selling of shorter-dated maturities as part of its policy program. The U.S. central bank will let the program expire at the end of this month.

�Given that the end of Operation Twist with the New Year eliminates the only �natural seller,� we�re constructive on front-end supply, to say the least,� said David Ader, head of government bond strategy at CRT.

The coming expiration of an insurance program for certain short-term accounts has also pushed investors into very short-term U.S. debt � mostly prominently pushing bill rates down but could also support debt maturing up to two years, said strategists at Nomura Securities. See: Going over the cliff in money markets, bill rates plunge 95%.