Interest rates surged Monday on Treasury, corporate and municipal bonds, as the Federal Reserve faced fresh criticism of its plan to pump more money into the financial system.
The jump in market rates, which began last week, has depressed the prices of many longer-term bonds in particular, dealing a blow to safety-seeking individual investors who have channeled record sums into fixed-income securities since 2008.
"It's been a brewing bond bubble, and now it's going the other way," said George Goncalves, a bond strategist at Nomura Securities International in New York.
Share prices of some municipal bond funds lost as much as 5% on Monday as sellers swarmed and buyers disappeared.
The sudden turnaround in rates also could threaten the housing market if it translates into sharply higher mortgage rates.
The yield on the 10-year Treasury note, a benchmark for mortgages, jumped to 2.91%, up from 2.75% on Friday and 2.65% on Thursday. The yield now is the highest since Aug. 4.
The rebound in yields is the opposite of what many investors were expecting in the wake of the Fed's new program to underpin economic growth.
The Fed on Nov. 3 committed to buying $600 billion of Treasury bonds by mid-2011, a move it had been telegraphing since August. By creating money from thin air and buying Treasuries, the central bank wants to keep long-term interest rates depressed, while also pushing more cash into the financial system — hoping the money will end up in the real economy.
But the plan, known as "quantitative easing" or QE, has stoked controversy inside and outside the Fed. Critics say that the central bank risks fueling asset bubbles worldwide with another round of easy money, and that the policy could eventually drive up U.S. inflation well beyond the modest increase that Fed Chairman Ben S. Bernanke has been hoping for.
On Monday, a group of economists and well-known Wall Street figures launched a public attack on the Fed's plan and called for Bernanke to halt it. In an open letter to the Fed chief, the group said the bond purchases "risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment."
The group's campaign may have worsened the selling in bonds: If investors fear the Fed won't buy Treasuries as promised, they may dump bonds out of concerns that yields will climb much higher, particularly if the economy gains strength.
In part, the bond market is facing the kind of indigestion that often follows a big rally. When the Fed began hinting in August that it wanted to do more to bolster economic growth, Wall Street assumed that the central bank would launch a new program to purchase bonds. That drove yields down and bond prices up for much of September and October.
By the time the Fed formally announced the plan Nov. 3, it was inevitable that some investors would take profits in bonds. But the selling over the last week has been far heavier than many experts had anticipated, said Ray Remy, a veteran bond trader at Daiwa Capital Markets in New York.
The Fed "did not expect this," he said.
The turnaround in Treasury interest rates has recouped only part of the steep slide in yields since spring. The 10-year T-note reached a 2010 high of 3.99% on April 5, before the economy weakened and pulled rates broadly lower.
Even so, for individual investors who have poured much of their savings into bonds over the last two years, the market's reversal is a reminder that it's possible to lose money in bonds.
The share price of the Pimco Total Return bond fund, the world's largest, fell 7 cents, or 0.6%, to $11.51 on Monday. The fund has lost 2.2% of its value in just the last seven trading sessions, the biggest drop in at least a year.
The losses have been heaviest in higher-risk bonds, including "junk" corporate issues, emerging-market debt and tax-free municipal bonds. Shares of the BlackRock MuniYield fund slumped 5.5% on Monday, bringing the loss over the last week to 10.3%.
Analysts say many investors have simply turned away from the muni market in the last week in the face of a huge supply of new bonds coming to market this month — including $14 billion in debt to be sold by California in the next two weeks.
Although the state said it attracted more than $4.4 billion in initial orders Monday for its sale of short-term notes, traders say potential buyers of longer-term munis have retreated, waiting to see how high yields might go.
"There's just no customer interest now," said Joe Lee, a trader at De La Rosa & Co. in Los Angeles.