The 10-year yield is marching higher, hitting a 2015 high of 2.38 percent. And if yields keep rising, it could soon mean big trouble for stocks.
"The 10-year has gone from 1.65 up to, say 2.30" in the past four months, said Larry McDonald head of U.S. strategy at Societe Generale. "If we move from 2.30 up to 2.75 in a very short period of time, that is definitely the pain point, because the market can't take that type of move in a very short period of time."
As McDonald sees it, market valuations will look exceedingly rich if yields move much higher. Since investors make allocation decisions by comparing the returns of different asset classes, higher rates will make bonds a better alternative to stocks, reducing demand for equities.
On top of that, McDonald says that higher yields will have a deleterious effect on the fundamentals of many companies.
"In the S&P, 45 percent of profits in the last five years are because of financial engineering and because of low interest rates. So you have a lot of companies offering a lot of very cheap debt, and that's very profitable for those companies," McDonald said in a Wednesday "Trading Nation" interview.