Trading Nation

The rate rise doesn’t matter to the markets. Here’s what does

Higher rates to slam stocks? Not so fast, market watchers say

It's been 4 years since bond yields were this high. That's causing some investors to worry.

But Craig Johnson, senior technical strategist at Piper Jaffray, has some words of wisdom: Watch the pace.

"It's not really the level that matters quite so much," said Johnson on CNBC's "Trading Nation" on Wednesday. "It's how fast you move up."

The charts do show a swift uptick in yields beginning in January. The yield on the 10-year ended 2017 at 2.41 percent but has since climbed to 2.9 percent over the past 7 weeks. Current yields are above their 200-day moving average of 2.35 percent.

But, the current pace is still not as sharp as a swing from 1.83 percent to 2.39 percent in the weeks following the U.S. presidential election in November 2016.

"When rates move up too quickly, something ultimately doesn't go right in the marketplace," said Johnson. "We've seen back in 2013 with the taper tantrum, we've seen back in '87."

Five years ago, yields surged after Federal Reserve chair Ben Bernanke said the central bank might slow asset purchases as the U.S. economy found its footing. The Fed's bond purchases were a holdover from the financial crisis, when quantitative easing was implemented to spur economic growth. The 10-year bond yield began May 2013 at 1.63 percent before spiking above 2 percent when Bernanke announced the Fed's intention.

In 1987, before the "Black Monday" stock market crash in October, yields spiked. The yield on the 30-year Treasury bond spiked to 10.25 percent in October, days before the crash, after hitting the year's low of 7.29 percent in January.

Michael Bapis, managing director of The Bapis Group at HighTower, agrees slow and steady is the best pace for bond yields.

"If it methodically rises, we'll be ok," Bapis said during an appearance on "Trading Nation." "What does make me nervous is if it shoots up. If it shoots up, we will have some dislocation in the market."

Over the long term, a move to 3 percent would be perfectly normal, added Bapis. The historical norm for yields on the 10-year Treasury bond are more than double current levels.

"While this is a short-term view, moving from 1.40 or 1.50 where it was last year to almost three percent, it is a big move, but historically speaking it reverts back to the mean," said Bapis. The long-term average on the 10-year Treasury bond is around 6 percent.

The 10-year yield has not reached above 5 percent since mid-2007. On Thursday, the yield rose to a high of 2.944 percent, its highest level since Jan. 10, 2014. The 10-year last traded above 3 percent on Jan. 9 of that year.

Correction: An earlier version misstated when 30-year Treasury yields spiked in 1987. It was days before the Black Monday crash.