While the stock market is floating at levels way above its early March lows, the Treasury market has been showing signs of weakness as investors, who flocked to the safety of government debt at the height of the credit crisis last fall, have now turned their attentions elsewhere.

This leaves the U.S. Treasury Department, and in essence the U.S. taxpayer, with a prospect of steadily rising costs of borrowing -- especially as the Congressional Budget Office projects a record deficit for the upcoming budget year.

From its mid-December low of around 2.06%, the yield on the benchmark 10-year Treasury bond has risen steadily to 3.18%. Meanwhile, the yield on the less-heavily traded 30-year bond has risen from around 2.5% to 4.19% in Monday trading. Bond yields increase as bond prices, and therefore demand, decrease. 

Bond yields have been increasing as investor demand to purchase record amounts of U.S. government debt has been subsiding. Last week, bond prices fell after an auction of $14 billion in 30-years failed to meet expectations. 

“These large auctions are starting to stress the system,” said Tom DiGaloma, head of fixed-income trading with Guggenheim Partners. “There have been too many auctions held too frequently, and the size of the auctions is growing too fast for the market to handle.”

While supply and demand always work in tandem, traders and investors said the main issue in the bond market right now is too much supply. The U.S. government has been issuing debt at a quickening pace in recent months, in part to pay for increases in government spending like $787 billion economic stimulus package, but also to take advantage of lower-than-usual bond yields. 

Traders said the problems have not been in the short term Treasuries, and still thought they were attractive at these levels.

Further, the Treasury Department recently upped its issuance of 30-year bonds -- increasing the supply of 30-years from $35 billion in 2008 to $120 billion this year. The government has also brought back the 7-year and 20-year bonds to help satiate demand. There has also been market chatter of the Treasury considering issuing a 50-year bond. 

“There’s been this really sharp increase in supply at the long end of the yield curve,” said Mike Pond, fixed income strategist with Barclays Capital, referring to bonds that have maturities over 10 years. “There was this insatiable demand for all government debt, but that seems to have gone away now.”

Another way to describe the stress in the long-dated end of the Treasury market is through what’s known as a 2-10 bond spread -- which is the spread between the shorter-dated two-year bond and the longer-dated 10-year bond. That spread hit levels not seen since 2003 -- an indication that investors have much lower interest in purchasing long-dated treasuries, especially with worries about inflation.

DiGaloma, who called last week’s weak 30-year auction a “shocker,” said part of the reason there’s been some weakness has been a return to the stock market and a decrease in the number of players in the long-dated Treasury market.

“The only thing that’s going to save Treasurys now is if the stock market begins ticking downward again or there’s some sort of weakness in the economy not already known,” DiGaloma.

The United Kingdom is also experiencing concerns with its bond auctions. Two months ago, the British government failed to sell all of its bonds worth about 1.75 billion British pounds and last week also saw somewhat weak demand for longer-dated bonds as well. 

While government yields are still low compared to historical examples, worries about inflation and rising government debt load may put continuing stress on long-dated bonds. 

“The government continues to push on a string with all the government programs that being initiated with very few spending cuts,” DiGaloma said. “If the administration continues to try to do too much too quickly, we may continue to see these issues in the bond markets.”