For bond investors, it feels a lot like 1994
Crank up Ace of Base, because the recent spike in the 10-year Treasury yield is reminding some investors of another banner year for yields: 1994.
Early in that memorable year, the 10-year yield rose by nearly 2 percentage points in three months (climbing from 5.6 percent to 7.5 percent). In 2013, bond yields have already risen 123 basis points (or 1.23 percentage points) since May 1, so a complete replication of that 1994 180-basis-point move would bring the 10-year yield above 3.4 percent.
Why look back that far? Because the recent rise in yields is without recent precedent. Setting aside 1996, 1994 marks the last time that the 10-year yield rose as much in 79 trading sessions as it did this year.
Another parallel comes in what was behind the rise in yields. Then and now, all eyes were on the Federal Reserve. However, while this year's rise has largely been driven by concerns about what the Fed might do, 1994's yield rally was driven by what the Fed actually did.
Back in 1994, concerns about inflation led the Fed to raise short-term interest rates. But the Fed's 1994 move seemed to take the market by utter surprise. In the present day, even if the Fed does choose to taper down its quantitative easing program in September, the move will have been widely expected.
"I think the situation today is somewhat different, as communication between the Fed and the market is fairly robust," said Lawrence McDonald, senior director at Newedge. "The Fed isn't going to repeat that mistake again."
Michael Block of Rhino Trading Partners similarly views Ben Bernanke's Fed as much more cautious than Alan Greenspan's. "The question is, what has the Fed's learning curve been since then? I'd argue that it's been very large," Block said. This time around, "they're going to stem the bleeding."
The reason that Fed signaling makes such a big difference is that the signaling itself becomes a policy tool. "Back then, there was no communication," Block said. But as he appraises the current situation, "My theory is that the Fed started talking about tapering because they wanted to avoid an overdone situation in credit and housing, and I think the Fed succeeded in doing that."
(Read more: Will US yield spike derail tapering plans?)
On the other hand, Lindsey Group Chief Market Analyst Peter Boockvar says it's not just the tools that are different—it's the goals, too. "In 1994, the Fed wanted that to happen," Boockvar said. "This time around, it's very different, in the sense that the economy is even more dependent on artificially cheap money."
Simply put, the Fed is doing much more now than it was then. While even the 5.6 percent interest rate at the beginning of 1994 was above the rate of inflation, the current Fed has been keeping real interest rates negative. "While both situations were disorderly, in 1994, the Fed pushed. Today, the Fed is tapping with a very light pinky finger—but the economy is much more levered to interest rates today, so it is more problematic," Boockvar said.
He believes that while the Fed does not want to ease, it will be forced to, because of the logistical reasons of less mortgage and Treasury issuance. "But the Fed will do everything they can to let markets know that it's a very gradual step," Boockvar said.
(Read more: Rocky September is ahead, warns BlackRock strategist)
Block, on the other hand, believes the Fed will not ease, because it has already engineered a spike in rates it wanted to see. The recent move "makes it much less likely that they're actually going to taper in September," he said.
Perhaps the chart settles this debate. McDonald, who writes at LawrenceGMcDonald.com, points out that "between 80 to 88 basis points over the 200-day moving average has been a good place to look for a turn."
Since the 10-year yield is currently 85 basis points above its 200-day moving average, McDonald believes a drop is imminent. For that reason, he is a buyer of the iShares 20 Year Treasury Bond ETF (TLT).
So maybe investors needn't brace for a 3.4 percent yield after all. And Ace of Base probably won't become cool again, either.