The 10-year Treasury yield has eclipsed the psychologically important 4 percent level, and so far the stock market is not freaking out.
Stocks rose Monday, as the bond market sold off (which pushes yields higher) and oil rallied in a global trade that cast a vote of confidence for the economic recovery. The March jobs report Friday was a positive catalyst, reinforced by surprising jumps Monday in the ISM non manufacturing survey and pending home sales.
The Dow edged closer to 11,000, gaining 46 points to 10,973, and the S&P 500 was up 9 at 1187. Energy and materials stocks were the best performers on expectations of rising global demand. The dollar was slightly higher against the euro, but lower against the yen and sterling.
Oil is not the only commodity bubbling higher, but it is the one traders worry has the most ability to stall stocks. Oil Monday rose $1.75 to $86.62 per barrel, gaining more than 8 percent since late March.
There is no significant data Tuesday, but traders will be watching the release of the minutes from the Fed's last meeting at 2 p.m.
"I think the important thing there is there's just an ongoing gradual trend toward and acknowledgement of economic improvement," said Adam Boyton, currency strategist at Deutsche BanK.
Monday's move up in yields is the continuation of a bigger trend toward higher rates on the back of stronger economic news. Some traders also say rates are moving up because of the massive supply of debt the government issues each month. This week, the Treasury was set to auction $165 billion in bills, notes and bonds, with $40 billion in 3-year notes at auction Tuesday.
The 10-year yield rose to 4 percent but finished the day at 3.98. It was last at 4 percent in June, 2009, and at that time there was a higher level of anxiety among stock traders.
"At the time, we weren't healed as much as we are now," said Tim Smalls of Execution LLC. "I don't think this is enough to make people switch assets yet. Let's give it more time."
Smalls said the lack of volume in the stock market is what's giving it an upward bias, more than buying interest. "I think the reason you see the equities market doing what it's doing is the liquidity is so bad and fund managers are still putting money in," he said. "I think if we had more volume and more liquidity, I don't think we'd be as high as we are..People are trying to put money to work, and it's more and more difficult."
Yields Monday moved higher across the curve, and the 10-year yield closed in on a level last seen in October, 2008.
"It just reinforces to us, along with the commodity moves that the market is getting to the point of fully believing the economic rebound much more than last time," said Jeff Kronthal, managing director of KLS Diversified Management LP.
Kronthal, however, said he remains skeptical. "The real question becomes are you having an economy that is picking up enough to support enough employment growth to get the Fed to move...the yield curve is flattening and it's telling you the Fed is more likely to move and you have an economy that is more likely to grow. We don't believe that, but the market is telling you that," he said.
Kronthal said the move up in yields marks a transition to a new trading range. "What it's really saying is there's a lot of worry the Fed is going to aggressively start to tighten six months out, and I think it's nothing more than that," he said.
"The move to a new trading range also reflects that markets are no longer in denial of the real size that must be financed coming from the deficits," he said.
Kronthal said a positive factor for markets is the fact that the U.S. and China appear to be working out their differences over China's currency policies. The Treasury this past weekend announced it would delay its April 15 report that could have labeled China a currency manipulator.
Boyton agrees. "What could be a source of tension in the relationship looks like it's being managed and certainly that's a positive for the global economy," he said. "I don't think it has any near term G-10 implications for currency." Boyton said however, if the two governments work out their differences, the Chinese currency could start to appreciate in the next three to six months.
"I'm still bullish the dollar," he said. Boyton said the euro was driven by sovereign debt concerns. "The dollar more broadly is being driven by anticipation of rate hikes by the Fed," he said.
"Interest rate differentials are driving the dollar more consistently than sovereign debt concerns," he said.
Boyton said he is watching for a possible Australian rate hike early Tuesday.
What to Watch
CNBC's Steve Liesman interviews Richmond Fed President Jeffery Lacker, beginning in Squawk Box.
Treasury Secretary Tim Geithner visits India to launch the U.S. India Economic and Financial Partnership.
National Economic Council Director Larry Summers and Energy Secretary Steven Chu speak at the Johns Hopkins school of Advanced International Studies for a joint energy conference with the Energy information Administration.
Stocks to Watch
Massey Energy will be in focus after an explosion at its Upper Big Branch mine resulted in six deaths. Twenty-one miners were stilll unaccounted for late Monday.
Toyota was fined $16.4 million for failing to notify U.S. regulators of the "sticky pedal" problem for at least four months.
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