The Treasury sold $44 billion in new two-year notes Monday at a higher interest rate than Wall Street expected, as investors demanded a better return to absorb the latest wave of government debt.
Treasury note and bond yields have risen sharply in recent weeks, in part on concerns about demand at this week's sales of $118 billion in U.S. securities.
Interest rates also have been facing upward pressure from expectations that the economic recovery will continue in 2010.
The Treasury, hungry for cash, is trying to raise a big chunk of change in a week when many Wall Street traders and investors typically are absent for the holidays.
The two-year notes sold at an annualized yield of 1.09%. Wall Street had expected them to pay 1.06%, according to a Bloomberg News survey of bond dealers.
The market yield on outstanding two-year notes has surged from 0.67% at the end of November. The steep run-up in yields suggests "the market is saying a fair goodbye to the land of 1%" for two-year securities, said George Goncalves, chief interest rate strategist at brokerage Cantor Fitzgerald in New York.
Treasury data on Monday's auction indicated that foreign buyers were less interested than usual in the two-year notes, while demand from banks and mutual funds appeared to be strong.
Sales of two-year T-notes usually are a breeze because investors don't see much risk in holding debt of that term.
More telling will be auctions of $42 billion in five-year notes today and $32 billion in seven-year notes Wednesday.
The five-year T-note yield, at about 2.58% late Monday, is up from 2% at the end of November.
In the same period, the seven-year T-note yield has surged to 3.34% from 2.69%.
The Treasury still is borrowing at relatively cheap rates overall. The big question is whether investors increasingly will figure that these yields are too low relative to what 2010 will bring for the economy and inflation -- not to mention the pressure from additional government borrowing to fund the yawning budget deficit.
The housing market has a lot riding on the trend in Treasury yields because mortgage rates take their cue from long-term government bond rates.