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10-year Treasury yield at 3%? Not a problem for stocks

Unlike in September, the U.S. stock market is taking the 10-year Treasury note's latest ascent to 3 percent in stride.

"It's encouraging to us that the capital markets have not freaked out, and stocks have continued to climb," said Jim Russell, senior equity strategist at US Bank Wealth Management, of the benchmark's gradual rise that on Thursday briefly culminated in it breaching 3 percent after another piece of positive economic news, this time weekly jobless claims dropping more than expected.

Traders on the floor of the New York Stock Exchange.
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Traders on the floor of the New York Stock Exchange.

That benign take on increased interest rates, or borrowing costs, is unlikely to change, according to Russell and other market strategists who believe the 10-year yield will rise to 3.5 percent in the not-too-distant future, without rattling equities.

"The market shouldn't feel threatened by a 3 percent handle on the 10 year," said Mark Luschini, chief investment strategist at Janney Montgomery Scott. In fact, if the Fed were taken out of the equation, the 10-year yield at 3 percent underestimates "at least the recent economic signs we've seen," Luschini said.

Jack Ablin, chief investment officer at BMO Private Bank, agreed, saying: "3.50 percent is probably fair value, or where the 10 year should be, as it tends to track nominal GDP over time. The question is, can the stock market overcome that headwind, or the battle between accelerating topline growth and accelerating interest rates?"

On Thursday, any winds on Wall Street blew from behind, with stocks extending their gains after the 10 year pulled just above 3 percent.

"We think an upward drift in the 10-year yield is likely as we hit year-end and into the new year," said Russell, who attributes the advance to the Fed being less of a buyer of Treasurys as well as what is "undoubtedly a firmer domestic macro situation."

"It's not inflation driven and the market is responding to the very strong likelihood that the Fed in 2014 will not be nearly as involved in the yield curve," said Russell, who thinks the Treasury market is probably several steps ahead of the central bank, and is already in the process of discounting the new couple of taper announcements.

While few would argue that the market is due for a correction, or pause, from its record-setting advance, the 10-year Treasury yield rise is unlikely to be an impetus.

"The 10 year will respond to the gradual growth progression in the economy that is now underway," said Russell, who expects the yield will finish 2014 in the 3.4 percent to 3.6 percent range.

"I, in fact, have 3.5 percent penciled in for 2014, on the back of what I think is accelerating GDP growth," said Luschini, who believes the level will likely not be reached until the second half of the year. "If it came sooner, that might worry equity prices a little bit."

—By CNBC's Kate Gibson

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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