Goncalves said the market is moving too fast. "I really think we're getting ahead of ourselves, and people are nervously anticipating tomorrow. I think that matters more than the fundamentals. I think it's more a supply-demand imbalance. I really don't believe that it's just that we have new data to digest and rates have to go higher. It's really more a buyers' strike, and if you're going to come into the market, you're going to want to be compensated for it. We've broken above 2.40 and nobody wants to step up," he said.
Other factors that affected market psyche were concerns about the European Central Bank ending its quantitative easing program. Reuters reported from unnamed source that the ECB will extend its bond purchases beyond March and decide whether to formally signal after its meeting next Thursday that it will eventually end the program. That sparked more selling in German bunds, and that activity pressured Treasurys in late morning trading. The market is also watching Sunday's Italian constitutuional referendum, which is expected to fail and result in a change of government.
The Treasury market was also seeing hedging interest due to corporate bond issuance. There was a pickup in issuance Thursday, after low activity Wednesday.
Companies issued $13.8 billion in investment grade debt Thursday, according Informa Global Markets. Three big banks — Citigroup, JPMorgan and Wells Fargo — were among the issuers.
Strategists said the fact that banks are moving to borrow in a rising rate environment does reinforce the view that managements see rates rising. Reich said corporate investment grade issuance could surpass last year's total of $1.25 trillion Thursday.
The bond market also continued to chatter about the fact that Steven Mnuchin, Trump's pick for Treasury secretary, said on CNBC Wednesday that the Treasury could consider longer duration bonds as an option.
Kohli said the action is welcome. "We've been waiting for a fire," he said, noting its helpful the economy is firming. "You want yields to be higher because there's expectations for growth ... but you don't want them selling off, or you don't want them up 60 basis points because somebody got squeezed. You want them up on future growth," he said.
Kohli said the month end trading in November was very telling and marked a turning point. Institutions who trade against a benchmark weren't jumping in to add to their holdings, as they have typically done at month end during the many years of low rates. "In the past they would have had to go out and buy to match the benchmark. It's dropped off … in the past it made sense to do that because the prevailing direction of rates was lower," he said.
"I think any time you violates these bounds usually you get a pullback in yield so you might retrace a bit. We've gotten here so quickly. We got from (10-year yield) 1.70 to 2.50 in very short order. It's been a big shock to the market. I think the immediate knee jerk reaction will be for shorts to take profits," said Kohli.