US Markets

'Sinister' things going on in the bond market, recession a possibility, strategist says

Rush into bonds a greater market risk than North Korea?

While there are geopolitical issues right now around the globe, strategist David Nelson told CNBC on Monday there are "more sinister things" happening in the bond market right now.

He called the 10-year Treasury's drop last week below 2.3 percent "kind of a line in the sand" because he's been looking for yields to break out to the upside, to about 2.6 percent. That, he said, would confirm the reflation trade and the market rally.

"We're breaking down now. You've got the long end of the curve coming in. You've got the short end of the curve going up because the Fed is starting to hike rates. You're starting to flatten the yield curve," the chief strategist for Bellpointe Asset Management said in an interview with "Power Lunch."

"At some point in time, economists are going to start using the 'r' word," he said, referring to a recession.

On Monday, the benchmark 10-year Treasury note broke below 2.2 percent for the first time since Nov. 17 before bouncing back to around 2.25.

At this point, Nelson said he can't stick his head in the sand. He said a recession is "a possibility."

"I don't want to be an Armageddon guy and I haven't cut my equity exposure but I have done some hedging," he said.

And while a rush into Treasurys is expected during times of geopolitical tension, it isn't the only thing weighing on investors, he said.

He thinks the biggest issue is what's happening with President Donald Trump's agenda.

The president has said his first order of business is to get the Republican health-care bill passed before hitting tax reform and infrastructure spending. A planned vote on the American Health care Act was cancelled last month after the GOP couldn't garner enough votes for passage.

"The failure of the health-care package really unwinds a lot of things. It means the agenda isn't going to pan out as we once thought," Nelson said.

That means the earnings-per-share bump that was expected in the latter part of the year is "not likely to happen."

Trump has said he still plans to complete both health care and tax reform by the end of this year.

—CNBC's Brenda Hentschel contributed to this report.