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Interest Rates Jump to Highest Level in Three Months

Treasury yields moved to their highest level in three-monthsWednesday, as selling hit the bonds sought as the safest haven in a scary world just a month ago.

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Traders said improving U.S. economic data was behind the selling. But they also pointed to a big seller overnight during the Asian session, who helped drive the 10-year yield back above 1.75 percent.

In the New York session, the 10-year yield moved above 1.80 percent for the first time in three months, well above the record 1.39 percent it fell to in July as fears about Europe’s debt crisis swirled. It has moved 0.155 percent in three days for its largest three-day yield gain since early June.

“It’s a continuation of a trend we’ve seen for some time now. If we look at the 10-year, we’re at 1.80 now. We were at 1.46 at the start of the month so we’re up 34 basis points in two weeks," said Dan Greenhaus, global market strategist with BTIG. “It’s coincident with the larger story which is that the economic data is not just getting better but that the Fed might do QE (explain this).” The 30-year added 7 basis points to 2.91 percent.

Bond manager Bill Gross, meanwhile, also turned on the 10-year Wednesday. Gross, co-chief investment officer at Pimco, told Reuters that the Federal Reserve’s(explain this) stimulus programs are inflationary, and that’s why he favors five-to-seven year maturities and would sell 10-year and 30-year Treasurys.

Gross tweeted that the Fed is where bad bonds go to die. “Today it was 10-years. Tomorrow 30-years. Stay short my friends,” he wrote.

As some of the economic numbers have been surprising on the upside, there has been market talk that the Fed may now not ease, as expected, at its September meeting. Many economists say the Fed is watching the data closely, and its members may not have made up their mindson whether to carry out another round of bond purchases. The next event markets are watching is the speech by Fed chairman Ben Bernanke at the Fed’s Jackson Hole symposium Aug. 31. (Read More:Fed's Fisher Says More Easing Won’t Help Much)

“You still have a fair amount of data” before the next Fed meeting Sept. 12, said John Briggs, senior Treasury strategist at RBS. “The data has not moved the needle measurably one way or the other. We just stopped disappointing. Even with this better data, I’m still seeing two-percent growth. You could make an argument that even if they’re on the fence, they might go now because they would not go later,” closer to the election. (Read More: Dunkelberg—More Fed Easing Will Only Help Big Banks, Not Employment)

Greenhaus said he does not think the data has been enough to change the Fed’s view on easing. “I think they like the idea of taking out insurance. I don’t think it’s off the table at all,” said Greenhaus. He also noted the inflation data is not a hurdle for Fed easing, since the latest CPI data released Wednesday showed consumer prices were unchanged, for a second month in a row.

The Fed’s goal, in quantitative easing, is in part to drive investors into riskier assets, and Greenhaus said, contrary to what many believe, QE has helped lift interest rates.

“We think the QE call has always been delicate. This is one reason why stocks aren’t moving that much. Treasurys are the medium the Fed uses to impart liquidity into the global financial system," said George Goncalves, Treasury strategist at Nomura Americas. "With Treasurys underperforming, you can extrapolate that it’s bad for stocks. Stocks have been just hanging out there for the last few days."

The S&P 500 broke through 1,400 for the first time in three months last Tuesday and a week later, on Wednesday, it was at 1,405.

But Goncalves said despite the better-than-expected reports, such as Wednesday’s industrial productionand Tuesday’s retail sales, it’s still not enough to affect the Fed. Goncalves said he does not expect interest rates to move much higher for now, and if the 10-year gets closer to 185/1.90, the Fed may take action.

“They’re going to start jawboning it, and doing verbal intervention. Rates should start to stabilize here, and if they don’t, we should expect a full court press from the Fed at the end of the month,” he said.

CRT Capital chief Treasury strategist David Ader said the big trade overnight really did set the tone for the market. “That did most of the damage,” he said.

“It’s unusual to see that,” he said. “There’s roughly $9 billion of 10-years that traded during the wee hours. That’s a lot.”

Ader said a number of factors combined to send rates higher. He said there has been a large number of corporate issuance for August, for example. “People were just a bit out of position,” he said.

The change in data is not enough to impact the Fed yet.

“The data has gone from presenting universally downside surprises to presenting a few downside surprises,” he said.

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  • 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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