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Stock traders are very leery of this recent rise in rates

  • Banks are on the rise. The main bank ETF (KBE) is at the highest level since March. Interest rate sensitive sectors like REITs have been lower.
  • Investors are trying to get ahead of a change in central bank policies around the world.
  • Is this a recipe for disaster? Not at this pace, but it's being watched carefully. The rise is not very great.

Rates are rising all over the world. In the last couple of weeks, the U.S. 10-year yield has risen to an eight-week high, Germany's 10-year bonds are at 18-month highs, Japan's are at five-month highs, France'sat seven-month highs.

It's moving stocks. Banks are on the rise. The main bank ETF (KBE) is at the highest level since March. Interest rate sensitive sectors like real estate investment trusts have been lower.

What's going on? Investors are trying to get ahead of a change in central bank policies around the world. We have had 10 years of unconventional policies that are slowly coming to an end. The Fed is already raising rates, and while neither the Japanese nor the ECB are raising rates, it's clear they are considering reversing their policies of buying bonds and stocks, in the case of Japan.

Is this a recipe for disaster? Not at this pace, but it's being watched carefully. The rise is not very great. Even the 10-year at 2.38 percent is only 20 basis points higher than a few weeks ago. That's a very modest rise, and the cost of funding is not changing prohibitively. It's a sign of strength that central banks are more comfortable with higher rates.

It's true, nobody is raising rates aggressively. This move is in anticipation of something more aggressive happening. The Fed minutes, released Wednesday, clearly indicated the Fed is not wedded to an aggressive rate hike schedule. And what about those who say raising rates, even if modestly, when the economy is only fair is a bad idea? Is 2.25 percent GDP growth great? Not really. But it's better than the 1.75 percent we've seen recently. And European growth prospects certainly have improved.

The risk is rates moving more aggressively. What might cause that to happen? Notably better U.S. economic data, which we don't have. There is still a split between the "hard" and "soft" data. For example, ISM services and ISM manufacturing—which is soft data—for June were both good. But the harder data—Durable Goods, Retail Sales, auto sales—have not been that great.

Inflation, the other factor that would cause the Fed to hike more aggressively, also is not there yet.

Keep an eye on tomorrow's jobs report for another clue on the Fed's rate hike path—wage growth. It's been pretty anemic—about 2.5 percent annual growth since late 2015. Add 2 percent inflation, and you still have essentially zero real wage growth.

If that were to suddenly accelerate, you'll see that rally in yields accelerate as well. More money in the average man's pocket? I'd gladly trade that for a flutter in the bond and stock market.

One final point: if this yield rally does indeed accelerate, watch for two possible effects on stocks: first, downward pressure on sectors with a large base of employees, as higher wages would pressure margins.

More important may be a sudden acceleration of volume in ETFs associated with interest rate-sensitive sectors, like REITs (VNQ), or builders (XHB).

In sectors with fairly low volumes, such as REITs, this may not be a trivial question. This morning, Sandler O'Neill had a very thoughtful piece on what might happen should a lot of investors suddenly decide that the rise in rates was going to accelerate and wanted to exit the markets quickly: " REITland is no longer in the purview of dedicated investors who could step in and defend oversold names. Global market forces are now disrupting the sector and active managers, under pressure to economically compete with passive funds, can no longer provide the stability they used to be able to."

This is a long-winded way of saying that groups that are now considered asset classes--like real estate, or even volatility—could move rather suddenly.

Watch: June ADP payrolls show consistent economy

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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