CNBC's Domm: Today's Agenda in the Markets

Stocks futures are wrestling with another surge in bond yields this morning and for now have the upper hand as futures edge into the positive zone. Asian markets closed lower overnight and European stocks are weaker.

Chicago Fed President Michael Moskow is speaking to senior economics correspondent Steve Liesman on Squawk Box this morning. In the exclusive interview, Moskow says inflation expectations are well-contained right now and rising rates have not changed his economic outlook. He also said he is concerned the market is underpricing risk. Stock futures, for now, have reversed earlier losses as the 10-year pulled off of lows, with rates coming back in to 5.185 from more than 5.2%.

The dollar is riding the yield curve higher this morning and is at two month high against the Euro.

The Dow has lost 3% in the last three sessions. As interest rates hit the highest level since last July yesterday, stocks went on an ugly downhill ride. The yield on the benchmark 10-year rose to 5.10%, up 0.13%, its biggest one day move up since March 9, 2005.

The Dow, battered all day yesterday, took a final dive in the last half hour after Reuters reported that Pimco's Bill Gross has turned into a bond bear after 25 years as a bull market manager. The Dow fell 198 points or 1.5% in its worse decline since March 13.

The S&P 500 lost 1.8% or 26 points, giving it a three-day loss of 3.1%. It is still up 5.1% for the year. The Nasdaq suffered a 1.8% decline yesterday, and a 2.9% drop since Monday. it is up 5.2% since the beginning of the year. The selling was across the board and the market's breadth was weak. The worst performing sectors were the interest rate sensitive homebuilders, off 3.56%, and utilities, down 3.26%.

Deals in doubt?

For several days now, our Bob Pisani has been talking about the rising fear among stock traders that the takeover binge could be in jeopardy as rates move higher and the easy money becomes more expensive for buyers. The Wall Street Journal discusses how some lbos are already looking problematic but on the whole, private equity deals are pretty healthy. A statistic mentioned in the article though is interesting. It quotes Standard and Poor's data which shows that companies that have gone private in buyouts are generating cash exceeding their debt interest payments by just 1.7 times, versus 2.4 times last year and 3.4 times in 2004, and the ratio is at a 10-year low.

What's Shaking in the Bond Market?

Rick Santelli, our resident bond market expert, likens interest rates to the stock market's out of favor, distant cousin. You don't think about them until they show up at your door, and that's what happened on Wall Street this week when the stock market woke up to moves in the bond market.

To simplify the big sweeping move in bonds, Santelli says imagine you have an adjustable rate mortgage or a floating rate loan for your business. Rates in the Treasury market are on the rise and have been suddenly picking up speed. So what do you do? You make the same moves the big players are making in the credit markets. You lock in the best rate you can.

Let's go back to the big players. They've been very active in the swaps markets, where big waves of selling pushed rates higher as traders move to fix floating positions to protect against higher rate exposure. In a rising interest rate environment, the rates of mortgage securities and agency securities, like the paper issued by Fannie Mae and Freddie Mac, move faster than Treasury rates. This would include the sub prime market and all forms of securitized mortgage loans.

That activity, on a grand scale gave us a big jump in rates.

"I do think the quick adjustment process that ramped them up will subside. It doesn't meant the trend of higher rates wont persist," he said.

Santelli says traders today are watching options volatility across all markets as the move in rates forces traders to reassess positions.