With stocks hitting yet another high, the question is whether bond yields could be getting ready to lift off.
On Tuesday, the rose 11 points, to 1,911, its second record-setting session in a row. The Dow was up 69, to 16,675, just 60 points from its all-time high. The Nasdaq surged 51 points, to 4,237, and even the battered small-cap Russell 2000 surged 1.4 percent, to 1,142.
Stronger data—better consumer confidence, stronger durable goods and improving home prices— combined to help stocks move higher Tuesday. But the bond market took the data in stride and instead of selling off—prices rose and yields moved lower. The 10-year touched 2.51 percent in late trading, well off its 2014 low of 2.47, from May 15.
For stock traders, the data helped temper concerns that a weakening economy has been driving rates lower. So now, the question is whether yields move higher or stay low. Several strategists say any increase in rates could be fairly slow.
CRT Capital chief Treasury strategist David Ader said yields could be in the process of bottoming, and he said the market is basically "muddling" along into the month end. He said the trading Tuesday was more about complacency than positioning with volumes at 78 percent of the 10-day norm.
"Certainly technicals and the like can make a case for breaking through and doing better," said Ader. "But in order to do better, we're going to need more than we got" in terms of weaker economic data.
Ader said the data was enough to give the market a bit of a concession. "I think people are frozen, and I think that's what this is telling you," he said, also noting investors shrugged off 2-year Treasurys at Tuesday's auction. "You see this in the same context that you see it in the volumes. The volumes are very low."
The market is also awaiting next week's European Central Bank meeting, where it is expected to cut rates and possibly discuss a quantitative easing program though it is not expected to announce QE. "It's been well-priced. You've seen their yields respond," he said.
Randy Frederick, managing director of active trading and derivatives at Charles Schwab, agrees that the ECB has been a factor. "From my perspective, the biggest catalyst for what's going on in the bond market, is what's going on in Europe…On a risk-adjusted basis, it just makes more sense to own American debt than debt of Italy or Greece."
Watch: Bubble in bonds?
Traders also blamed the recent move lower in yields on repositioning and the unwinding of a massive short position in the bond market.
"I think everyone that tried to figure out what bond yields were going to do this year has been wrong," Frederick said, adding even if yields have not bottomed, they are not going up fast.
"You used to be able to count on the bond market going in the opposite direction of the stock market, but that's not the case anymore. The old adage that went back many decades has gone," he said.
Stock market gains could be one factor that trips up the bond market. MacNeil Curry, head of global technical strategy at Bank of America Merrill Lynch, warned bond market bulls to beware in a note Tuesday, even though he says the long end is in a medium-term bull trend. He said the S&P 500 has resumed its uptrend and that gains should continue to the 1923 level or beyond.
"Such a move could be problematic for Treasury bulls, especially in the long end," he wrote. "…Key pivotal support is drawing near," he wrote, noting for the 30-year the year-to-date trendline is 3.454 percent and the Feb. 4 low of 2.568 percent in 10s are the levels to watch.
As for stocks, Frederick says there's no real catalyst that looks set to disrupt the trend higher but noted that seasonality is worrisome, and it could be a factor.
"The S&P in 2013 lost 1.2 percent between Memorial Day and Labor Day, even in a year that was up 30 percent. If we do lose 1 or 2 percent it would probably be a buying opportunity," he said.
What to Watch
There is no data of note Wednesday, but there are two bond auctions. The Treasury will auction $13 billion in floating rate 2-year notes at 11:30 a.m. ET and $35 billion 5-year notes.
—By CNBC's Patti Domm.