Bonds are getting destroyed, and that may not be bad for stocks

Some strategists foresee stocks climbing even higher, despite the Federal Reserve's expected rate hike on Wednesday.

As bond yields have surged in the weeks following the election — with the 10-year Treasury yield rising from just below 2 percent to above 2.5 percent since Nov. 9 — U.S. equities, too, have rallied to all-time highs.

The yield on the 10-year hit 2.526 percent on Monday, its highest level since September 2014. As The Lindsey Group's Peter Boockvar wrote in a note Monday several hours after this milestone was reached, "The upward lurch higher in the cost of capital continues."

Rates that have been kept low by the Fed's actions have been a major tailwind for the market.

The price of stocks and bonds traditionally move inversely, as investors move to what is considered the safety of government bonds in times of market turmoil, thus pushing rates lower. Investors have fled the bond market with expectations of higher inflation and economic growth under a Donald Trump administration. The face value of a bond decreases as yields rise.

Rates, however, remain low on a longer-term basis. In a chart of the U.S. 10-year Treasury yield going back to the 1940s, Craig Johnson, senior technical research analyst for at Piper Jaffray, points to a period of rising rates in the 1950s at which time equities boomed.

"So from our perspective, we don't think rising rates in here are going to be a problem for equity markets going forward," Johnson said Monday on CNBC's "Power Lunch," pointing to an "inflection point" that we have recently reached.


"Rates are starting to move higher, and our forecast for 2017 is, we are calling for 3 to 3.25 [percent] on the 10-year bond yield, and we think equities are going to go along with it," he added.

Johnson places a year-end target on the S&P 500 of 2,350 – about 4 percent above Monday's close.

The Fed is expected to announce a rate hike on Wednesday, its first in a year and second in a decade. At this juncture, the Fed appears to be in "pretty much a panic mode at this point," said Boris Schlossberg of BK Asset Management.

On a longer-term basis, many strategists believe the central bank will raise its interest rate target multiple times in 2017 after raising rates this week, but not Schlossberg.

"They don't want to see this 'melt up' in rates so far so fast and this massive move in the dollar, as well, because it is going to start to impact profits in [the first quarter] if the story just continues unabated," Schlossberg said, referring to a potential surge in the value of the currency.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect