U.S. Treasury Dept.Stocks may be poised to deliver their best December performance in almost two decades, but it's the machinations in the bond market that have been captivating investors recently.

The question on market-watchers minds is this: Does the recent rapid rise in yields on U.S. government bonds signal a return to economic normalization, or are the nation's creditors finally getting fed up with financing soaring U.S. deficits? Both sides saw evidence to bolster their views this week.

The doomsayers got a major leg up on Dec. 28 following a tepidly received five-year Treasury auction that sent yields soaring.

But that auction may have been an outlier in a short week marked by light volume. Indeed, a seven-year note auction the next day fared better and saw indirect bidders -- including foreign central banks -- buy almost two-thirds of the offering, the highest level since June 2009.

While the wide daily swings make for attention-grabbing headlines, investors would be wise to look at the bigger picture instead. A mounting set of data suggests the U.S. economy is staging a far stronger recovery than most had predicted, and as the gloom clears, investor preference for stocks over bonds is likely to gain further steam. Also, concerns about inflation -- as opposed to the deflationary worries that pervaded Wall Street over the summer -- are likely to pressure government bonds further.

Threat From Bond Vigilantes Is Overblown

For the moment, there are plenty of reasons the world's savings continue to be funneled into the U.S. The American economy and financial markets remain ahead of the pack despite plenty of problems.

"Rising powers such as China are not yet ready to absorb the $9 trillion in reserve assets the world holds, particularly because their bond markets are immature," Anthony Crescenzi, a money manager at bond giant Pimco wrote in a report this week. "Europe, amid all of its financial woes, isn't even close to ready to take the mantle."

Indeed, the relative position of the U.S. economy and markets on the world financial stage suggests that predictions that bond vigilantes are about to dump American debt -- often politically motivated -- are vastly overblown.

Even Housing Is Stirring

But investors should note that it's now a swell of strong economic news that may be putting pressure on Treasury prices. Indeed, the 10-year note sold off substantially in the wake of bullish data Thursday.

Initial jobless claims, for example, came in far better than expected this week, at their lowest level in more than two years, after either falling or holding steady for five of the last six weeks. and other signs of a increasing strength in the labor market have been mounting. The Chicago Purchasing Managers Index clocked its highest level in 22 years on Thursday and remained in expansionary territory for a 15th month. Even the housing market showed some signs of life, with pending home sales beating analysts' expectations.

As the economic recovery gains steam, ultrasafe investments like U.S. government bonds will become less attractive at their currently low yields. A rosier labor market, for example, may prompt the Fed to reduce the size of its second round of quantitative easing, which involves buying short-dated Treasuries.

Some signs of rising prices may revive the inflationary concerns that accompanied signs of a strengthening recovery in the spring. That could further pressure low-yielding Treasuries.

So, at least in the short run, those holding U.S. government bonds should be far more concerned about economic strength at home than creditors getting skittish abroad.

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PAULA

The people that are as they say spot on with the market are the market maker's that what you to invest what you have so that they can manipulate your money instead if their's.

January 03 2011 at 10:27 AM Report abuse +1 rate up rate down Reply
1 reply to PAULA's comment
Lawrence

Mr. Kumar makes a good case for the recovery...course if hatin' the Prez is your life's work ya may not of noticed..

January 03 2011 at 9:30 AM Report abuse -2 rate up rate down Reply
2 replies to Lawrence's comment
Trevor

Actually, he wasn't making a case for economic recovery so much as trying to explain recent bond market weakness. A stronger economy could indeed be one explanation. A credit squeeze due to higher US government borrowing could be another. Last and probably most accurate is the markets recognition of pending inflationary pressure. Of course, some component of all of the above could be at work.

January 03 2011 at 10:27 AM Report abuse +1 rate up rate down Reply
PAULA

As long as Obama is around there is bound to be some kind of false recovery, to make him reelectable, that's all he care's about (VOTES), once the American people see him for what he is and run him and his crew off that's when you will begin to recover.

January 03 2011 at 10:31 AM Report abuse +1 rate up rate down Reply
easymoney235

President Obama and his administration continue to do superb work for America.

January 03 2011 at 8:29 AM Report abuse -4 rate up rate down Reply
4 replies to easymoney235's comment
ajallenky

This entire financial fiasco BEGAN when Slick Willie repealed Glass-Steagall in the 1990's - that opened the door for " too big to fail " and allowed brokerages and banks to become intertwined - THAT IS EXACTLY WHY IT WAS INSTITUTED IN 1933, after Wall St. crash that precipitated the Great Depression. then the political hacks in Wash. pandered to voters for their re-elections and allowed the toxic loans to be absorbed by Fannie and Freddie - this same " too big to fail " situation WILL happen again in the near future because the bill that Bawny Fwank and Chris " Countrywide " Dodd foisted upon the American public does NOT solve the Fannie and Freddie problem - and These same Congressmen were the ones responsible for not doing thier jobs and overseeing the SEC and Wall St. !!!! Birng back Glass-Steagall !!!!!

January 03 2011 at 7:57 AM Report abuse +5 rate up rate down Reply
2 replies to ajallenky's comment
Trevor

The notion of "too big to fail" long preceeded the repeal of Glass Steagall. For example, it was often citied in government escues during the late 70's/early 80's banking crisis. In fact, if anything, it was the CREATION of regulations like Glass Steagall and the FDIC that opened the door for "too big to fail".

January 03 2011 at 8:57 AM Report abuse rate up rate down Reply
PAULA

I agree the repeal of the Glass-Steagall in the 90's was definitly the start of all this crap we'er in now, Slick Willie's administration did not turn around until we put a republican congree together for him, after that he might have done alright had he not the road scholar that he was tried to redefine what was and what was not a sex act, what an embrassment he turn'ed out to be.

January 03 2011 at 10:42 AM Report abuse +1 rate up rate down Reply
ilduce2

MARXISM is the disease..............CAITALISM is the cure.......... Obama and the Dems won't change course .............so Republicans need to take over the ship.

January 03 2011 at 6:11 AM Report abuse +6 rate up rate down Reply
2 replies to ilduce2's comment
bushwasanidiot

MARXISM IS A PHOBIA MADE UP BY THE REPUKES, THEIR THE ONES WHO ARE SUFFER FROM IT. WHEN WAS THE LAST TIME WHO HEARD A DEM SUFFERING FROM MARXIST PHOBIA? THE REPUKES NEED SOME HELP........

January 03 2011 at 9:20 AM Report abuse -1 rate up rate down Reply
PAULA

Dem's. don't change they have alway's been about give a way program's, that's why you have a great many minorties that vote democratic along with the jewish vote at least most of them, the only real way the Obama got in office was throught those votes and the independent and college vote, the independent's I'm sure would like a do over as for the college kid's they just thought it would be cool to have a black and white president, that was a one time event I'm sure that when the college kid's found out how serious it was and mom and dad that was paying for their education found out what they had done, they won't be back. Democrates love to spend every one else's money, it's their's they don't like to spend unless they see a profit.

January 03 2011 at 10:57 AM Report abuse +1 rate up rate down Reply
ilduce2

t

January 03 2011 at 6:09 AM Report abuse rate up rate down Reply
evd10

"TIME FOR PRICE CONTROLS"...Except for the fact that they NEVER work.

January 03 2011 at 4:13 AM Report abuse +4 rate up rate down Reply
Don

UNLESS SOMTHING IS DONE ABOUT THE PETROLIUM MARKET, ANY REAL HOPE OF RECOVERY IS DOOMED. TIME FOR PRICE CONTROLS

January 03 2011 at 3:45 AM Report abuse +1 rate up rate down Reply
1 reply to Don's comment
bethtarbell

How do you find good refinance rates? I like "123 Mortgage Refinance". They gave me the option of selecting various rates with different problems. I choose the lowest rate of 3.29% BTW Remember to call and verify the loan rate. Search online to find them.

January 03 2011 at 1:53 AM Report abuse -3 rate up rate down Reply
CnOWrms1

Yep, I would write in McCain before I would vote for Romney. We need a safe and secure country in which to build an economy. Voting for personal values is more than choosing a candidate who has never been divorced. A divorce is overrated as a flaw when our nation needs freedom from deficits, terrorists, and those dreaded notorious intentional flipfloppers. Thank you, tea partiers, for keeping republicans on life support for two years, and after the strangulation hold on them during the past 30 years.

January 03 2011 at 1:14 AM Report abuse -5 rate up rate down Reply