Stocks are having a bit of a hissy fit over higher yields

Traders work on the floor at the New York Stock Exchange.
Getty Images

Stocks are having a bit of a hissy fit over higher yields. Bond yields were sharply higher in Europe this morning, and midday the U.S. 10-year yield is at 2.18 percent, up 3 basis points, highest since early March.

One factor is oil, which is moving to new highs for the year, along with a recent rise in other commodities like copper and aluminum, all of which is igniting a debate about inflation.

The yield rally seems to have started in Europe, particularly in German bunds, right after the U.S. markets opened.

Yields really began to move up about the time the ISM Services report was released at 10 a.m. ET. It came in at 57.8, above expectations of 56.5, and more importantly the employment component also showed some improvement, suggesting that Friday's nonfarm payroll report may come in on the high side of expectations.

Interest-rate sensitive sectors like REITs, Utilities and Home Builders have been under pressure all morning, down roughly 2 percent.

Several ETFs have seen heavy volume including the Russell 2000 ETF, which makes sense since small-cap stocks are more interest-rate sensitive than large caps.

Treasury ETFs are also seeing heavy volume right across the spectrum: Treasurys, corporate bonds and High Yield.

With the long end of the curve backing up, some banks have been moving up. JP Morgan, for example, is at a 15-year high.

What's all this mean? There's no doubt that some bond traders have been stopped out of their positions in European bonds; German bunds, for example, have gone from 16 basis points to 52 basis points in just the last few days.

For the moment, let's just keep to it to a hissy fit. However, if we see a strong move up in nonfarm payrolls for April—particularly with a revision for the weak March numbers—and commodities continue to rally, then the bond selloff may have some real legs.