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Will 2013 finally be the year that Treasury yields rise and spell the end of the generational rally in U.S. government debt prices? Treasury ETFs have been mauled this week after the fiscal cliff compromise and latest Federal Reserve minutes, and were set for further declines Friday following the jobs report.

The iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) was down 0.6% in premarket trading Friday. Bond rates and prices move in opposite directions.

The U.S. economy created 155,000 jobs in December and the unemployment rate was unchanged at 7.8%. Economists surveyed by MarketWatch expected an increase of 160,000 jobs last month, according to a report.

The yield on the 10-year Treasury note has jumped from a low of about 1.6% in December to nearly 2% in less than a month. The budget compromise has curbed demand for safe havens on expectations the deal will support the U.S. economic recovery.

Also, the Fed minutes released Thursday suggested the central bank may unwind its bond-buying program as early as this year. The Fed has been purchasing Treasuries and other debt securities after the financial crisis in an effort to keep rates low and stimulate the economy. This has helped keep rates low and Treasury prices high.

On Friday, 10-year Treasury yields rose to an eight-month high, but pulled back somewhat after the jobs report.

"We think the Treasurys market overreacted to the FOMC minutes," said Mike Pond, head of global inflation-linked research at Barclays, in a Dow Jones Newswires report. He pinned more of the sell-off on investors positioning ahead of Friday's jobs report.

The Treasury ETF is down about 5% for the holiday-shortened week, and trading volume has been picking up. TLT has crashed below its 200-simple moving average, which had provided strong support in recent months.

Bond Bubble?

Of course, the question is whether this will finally be the year that interest rates rise and all those investors who piled into bond funds and ETFs feel serious pain.

If the economy keeps showing signs of improving and steady growth in jobs, then eventually, it will chip away at the negative confidence that Americans and investors have after the financial crisis.

In a way, investors hiding out in cash and bonds hold the key to turning the stock market around. We could see a waterfall of cash move off the sidelines and tumble into equities if yields spike. Basically, investors have pulled about $2 trillion out of equities after the financial crisis and moved into fixed-income.

Improvement in the monthly jobs reports and housing data should bolster confidence, although an interesting question is what happens to real estate prices if mortgage rates creep higher from historic lows.

The government finally reached an agreement on the fiscal cliff at literally the eleventh hour. The details need to be hammered out, but at least this episode appears behind us.

The Fed minutes this week suggest that the central bank isn't going to buy bonds forever. Hopefully, we can begin moving toward more normal circumstances and less stimulus from the Fed.

Of course, the Fed says it plans to keep short-term rates near zero until at least mid-2015. Most investors take that to mean the economy and jobs market won't be healthy until then, so they're writing off the next couple years. Weaning the market off Fed support should be painful at first, but ultimately would be healthy for markets.

The bottom line is that continued economic improvement and the Fed hinting at light at the end of the tunnel should push Treasury yields higher and related bond ETFs lower. Investors who flocked to Treasury funds and ETFs need to be careful here. Treasuries will be anything but "safe havens" if yields continue to rise.

iShares Barclays 20+ Year Treasury Bond

(click image to enlarge)

Full disclosure: Tom Lydon's clients own TLT.

Source: iShares Treasury Bond ETF Still Falling After Jobs Report