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Bond yields are on a tear — but don’t let the move fool you

The yield on the 10-year Treasury note hit its highest level in a little over month in Friday trading.

But some strategists say bond yields edging up is not an indication that economic growth is picking up substantially.

"The bond market has largely been telling us, 'growth is mediocre at best,' and the stock market has been saying, 'buckle up, it's going to be great.' And it's a little bit hard to imagine a scenario in which both those things are true," said Max Wolff, market strategist at 55 Institutional, Thursday on CNBC's "Power Lunch."

As bond yields have fallen this year, equities have continued climbing to new heights; Wolff concluded: "The bond market and the stock market sort of don't seem like they see the same world. And it doesn't necessarily mean which one is right and which one is wrong — but they can't both be right," and said at this juncture the bond market is likely "telling a reasonable story here" though he doesn't see any huge disaster looming on the horizon.

Wolff added that "radical tax reform, rationalization of all kinds of regulatory environment issues ... they might have sounded really good but they are aging relatively poorly as a promise."

The yield on the 10-year Treasury note hovered just above 2.28 percent on Friday, and began the year just above 2.4 percent. The price of the note has risen, as bond yields and prices move inversely.

Bond yields around the world, particularly in the euro zone, have risen this week as central banks have appeared increasingly hawkish in their rhetoric, pointing to hints of inflation. In early Friday trading the German 10-year bund was set to have its biggest weekly jump since late 2015. French and Italian 10-year bond yields on Friday both touched new multiweek highs.

Bond yields will likely creep lower this year, said Sam Rines, senior economist and portfolio strategist at Avalon Advisors. Rines wrote in an email to CNBC that he expects the U.S. 10-year yield to fall to 2.25 percent, assuming tax reform will come next year. Should tax reform yield a "disappointing outcome," he wrote, "I will be ratcheting that forecast lower."

At the same time, Rines said, it appears two forces are working opposite one another when it comes to bond yields — tax reform and weak inflation.

Fed Chair Janet Yellen "has admitted that inflation pressures would be tepid, but stated that the forces holding inflation lower were transitory. Tax reform could change this by boosting growth and therefore inflation. With most analysts pushing this to 2018, inflation is not expected to materialize in the near term," he wrote, adding that since inflation is of one of the primary drivers of the longer-term yield, he would hesitate in becoming too bearish.

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Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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