Why interest rates could be the 'fly in the ointment' for the market

Interest rates and classic measures of inflation have been pinned down to historically muted levels in recent years. As both show signs of creeping higher, some market watchers see the combination as a potential headwind for stocks.

Inflation and the 10-year Treasury yield rising together are of particular importance to Mike Binger, senior portfolio manager at Gradient Investments. He told CNBC's "Trading Nation" the combination could be the "fly in the ointment" for the market. Here are his reasons why.

• Consumer Price Index data published earlier this month reflected the largest increase in 11 months; the index is traditionally a reliable inflation gauge.

• Treasury yields have been rising steadily this year. The 10-year Treasury yield on Thursday hit its highest level since mid-2014; the 2- and 5-year Treasury yields hit their highest levels since 2008 and 2010, respectively.

• The broader fundamental backdrop is relatively healthy, so rising rates and rising inflation after an elongated period of tepid inflation growth could present a headwind for stocks, as well as a buying opportunity in bonds.

• Investors may begin viewing bonds as more attractive as the U.S. 10-year Treasury yield climbs toward 2.7 percent; it was at 2.64 percent Friday morning.

Bottom line: Steadily rising inflation indicators coupled with rising Treasury yields could prove to be a headwind for stocks.

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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.

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

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