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The most surprising trade of the year is finally turning around

This week, Treasury yields have finally begun to move higher. But does that spell big trouble for stocks?

The bond trade was supposed to be the biggest lay-up on Wall Street this year. As the Federal Reserve tapered down its quantitative easing program and started to look toward raising rates, nearly everyone expected Treasury yields to rise. Instead, the key 10-year Treasury yield has only fallen lower, from 3 percent at the beginning of the year to below 2.4 percent.

Many have viewed the historically low yields as a big driver for stocks, given that they make equities more attractive relative to bonds.

This week, however, rates have begun to move higher. And that's causing some to worry about the prognosis for the great American rally.

"We certainly do expect rates to move higher, and as it relates to equities, this is a negative for equities in the short term," said Erin Gibbs, equity chief investment officer at S&P Capital IQ.

(Read MoreWhy stocks could get slammed soon)

Gibbs points out that investors have been buying dividend-producing stocks instead of bonds, but as yields rise, investors get a reason to switch out of bond-like stocks and into bonds themselves.

"If we see investors shift their preferences over to fixed income, over to Treasurys, stocks could certainly take a hit," she said. "Typically we see about an 8 percent correction when this happens."

But there is a silver lining: Rate-triggered corrections tend to be short-lived.

After dropping 8 percent, "the market then returns upward because higher rates mean inflation and it means a strong economy [and thus] good earnings. So investors refocus, and longer-term, the market goes back up."

This week, Treasury yields have finally begun to move higher. But does that spell big trouble for stocks?

This week, Treasury yields have finally begun to move higher. But does that spell big trouble for stocks?

"It's not necessarily that the level of interest rates matters for equities, but it's the rate of change that tends to spook the markets," he said. "So when interest rates move very quickly, that's when you get that big correction."

(Read MoreTreasury Department auctions $21 billion of 10-year notes at a high yield of 2.535%)

Based on his charts, Pytlar does think that the 10-year yield has bottomed out and is set to rise, at least up to 2.7 or 2.8 percent. But for him, that's no reason to panic.

"If it does cause some near-term volatility in equity markets, we do think that it would be a buying opportunity," he said.

For the full conversation on bonds and stocks, with Erin Gibbs on the fundamentals and Steven Pytlar on the technicals, watch the above video.

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