Why a massive surge in bond yields could be around the corner

Bond yields are due to rise in a big way, according to strategist Larry McDonald of ACG Analytics.

On Tuesday, the 10-year U.S. Treasury yield fell to 2.07 percent — its lowest level since November 2016. Given that the economy continues to be on firm footing, many say the move reflects global jitters.

"Geopolitical risk coming out of North Korea is driving yields much, much lower," McDonald said Tuesday on CNBC's "Trading Nation." Yields are being driven "unsustainably lower, in our view."

Bond yields generally reflect the strength of the economy. The greater the perceived chance for earning money in other assets, and the higher the expected rate of inflation, the loftier yields will tend to be.

Based on that metric, yields are strikingly low indeed. McDonald points to Friday's reading of the Institute for Supply Management manufacturing index, which came in at the highest level since 2011. Back then, yields were "1.5 percent higher than they are now," he noted.

Looking forward, political catalysts could also conspire to send yields higher.

"The political upside risk of tax reform is being massively discounted," McDonald said. "That will drive bond yields much higher," given that it could lead to a stronger economy, and could lead individuals to sell bonds (driving up yields) in order to buy stocks.

All in all, McDonald compares the 10-year yield to "a beach ball under water" which is currently being "extremely suppressed by geopolitical risk" — and is primed to whoosh higher if and when that risk dissipates.

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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.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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