Market Insider

Taper talk pervades markets ahead of auction

Traders on the floor of the New York Stock Exchange.
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Crankiness pervaded the markets Wednesday as stocks headed south, and bond yields edged slightly higher ahead of the Treasury's afternoon auction.

Taper talk is part of the reason, as a trader note making the rounds pointed to a rumor about a think tank that sees the Fed moving to taper in January or December, rather than waiting for March, as expected by many on the street. There was also speculation that Fed Vice Chair Janet Yellen, expected to be confirmed ahead of the January meeting, would preside over that meeting rather than Fed Chairman Ben Bernanke, clearing the way for a Fed taper then.

"The market is sensitive to back and forth chatter. It's just noise ahead of the auction," said Ian Lyngen, senior Treasury strategist at CRT Capital. The Treasury is auctioning $21 billion in reopened 10-year notes at 1 p.m. EST. The 10-year yield was at 2.83 percent, well within its recent range and up slightly from 2.80 earlier in the day.

(Read more: Time for bond market to put down bets on tapering)

"The market has little more to focus on than supply and the Fed tapering of QE (quantitative easing)," he said. Lyngen said the budget deal announced by congressional leaders Tuesday was a slight negative for bonds, since it diminishes the risk of a government shutdown.

The Fed meets Tuesday and Wednesday, and the odds have been rising that it could taper its $85 billion monthly bond buying at next week because of November's better–than-expected jobs report. Most Fed watchers, however, believe the central bank will move early next year instead.

(Read more: Get ready! Here it comes - the December taper)

Peter Boockvar, chief market analyst at Lindsey Group, said the bond market speculation is meaningless and it is expected Yellen would take over when approved. "That's just how the institution works. These are all transitional issues. Technically speaking, if Yellen gets approved before the January meeting, you have two chairmen and Bernanke will step aside," he said.

Boockvar said the stock market is beginning to show a hypersensitivity to the euro's moves. When it moved higher earlier in the session, European stocks suffered, and Boockvar said the went down with them. The euro hit a morning high of 1.38 to the dollar.

"This is just a continuing trend. The gain is building on itself. The new leg started last Thursday when (European Central Bank President Mario) Draghi gave only short comment about a negative deposit rate, which meant he wasn't looking to rush that any time soon," Boockvar said. He added that other comments indicating the ECB would stay on the sidelines came from ECB executive board member Benoit Coeure earlier Wednesday in an interview with Die Zeit.

Coeure said he would not rule out further moves to help the euro zone economy but they are not needed at the moment. "Now it's [the euro] just gaining steam and it's sucking the blood out of European exporters. There's no doubt our markets have been highly correlated to the top European stock markets, primarily Germany," Boockvar said.

(Read more: Why the economy might finally take off)

Taper talk has also been a negative for stocks, and Boockvar said it has not been priced in at a time when the markets are tilting toward an extreme bullish bias.

Boockvar pointed out that Investors Intelligence reported the percent of bulls rose again to 58.2, just below the October 2007 level. Bears were unchanged at 14.3, the lowest level since 1987. He also noted that the four-week average of the number of bulls divided by bears is the highest since at least 2004. In the 12 instances over the last decade when this indicator peaked, a correction of at least 5 percent soon followed.

On another note, the exodus from bond funds this year is the largest ever, according to Trim Tabs. It said year-to-date, there have been $70.7 billion in outflows, surpassing the $62.5 billion in 1994.

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.