Pisani: Traders still troubled by bond yields

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

Stocks dropped again Wednesday, and traders continued to have trouble digesting a rise in bond yields.

Those yields have been rising for several days, and on Wednesday, 10-year yields rose to their highest levels since early March.

Yields rose despite a disappointing report from ADP, which is a measure of private-sector job growth.

That report implies Friday's nonfarm payroll report might be weaker than expected, which would normally drive down bond yields because it would likely delay the moment when the Fed raises short-term interest rates.

What's driving this yield rally? First, commodities, particularly oil but also copper and other base metals, have been rising recently. That's fueling inflation worries.

Another issue is what's going on with European bonds. German bond yields, for example, have recently gone from 15 or so basis points to 50 basis points as big bond players like Bill Gross and Jeff Gundlach have been saying German bund yields were a big short.

That rapid and violent rise means that other global bond yields had to respond.

There's also been a big unwind of some very successful trades. Remember that traders have made a lot of money this year on several positions: 1) long the dollar, 2) short the euro, 3) short oil, and 4) long European equities, particularly Germany.

All of this is continuing to come unwound. Today, the dollar was weaker, the euro is at its highest levels since February, oil hit its highest level in a year, and German stocks hit their highs a month ago and are off 8 percent.

Result: interest rate sensitive groups like Utilities, Telecom and REITs all underperformed Wednesday.

There was also much heavier than normal volume in long Treasury bond ETFs, particularly those that are short the Treasury market, as well as high yield bond funds.