Trading Nation

Watch out for this key relationship in the bond market as the Fed makes its move Wednesday

Trading Nation: Rates on the rise

As the Federal Reserve tinkers with monetary policy, the bond market is on the move. One market watcher says the next move on rates could indicate whether we're in for a market slowdown or worse.

"The interesting point here is that the [2/10-year Treasury note] spread is compressing," Boris Schlossberg, managing director of FX strategy at BK Asset Management, told CNBC's "Trading Nation" on Tuesday. "That's troubling because that means the market is basically suggesting there's going to be a slowdown at best and perhaps a recession at worst."

The 2/10-year spread was at 54 basis points as of Tuesday afternoon. The spread has been in a steady decline since March 9 after hitting the highest point of the year at 78 basis points on Feb. 9. The yield spread is calculated by measuring the yield on the 2-year Treasury bond against the 10-year note.

"Until that spread widens I'd be very careful about going long equities," said Schlossberg.

To Schlossberg, these moves on the bond market reflect investors' cautiousness. Secular forces such as rate hikes from the Fed, the central bank's winding down of its balance sheet, and more borrowing from the U.S. government are having an impact on the yield curve, he told CNBC.

The yield curve, another measure of the relationship between short- and long-term bonds, is beginning to flatten. That means that shorter-term bonds such as the 2-year are showing more equal yields to bonds such as the 10-year. A flatter yield curve typically reflects that investors are less confident in the economic outlook and, therefore, have a lower risk appetite.

Matt Maley, equity strategist at MillerTabak, is keeping an eye on the bond market's changing trends over the longer run.

"We're in the middle of a process here where the long-term trend in rates is going from down to up," Maley told "Trading Nation" on Tuesday. "This has been going on for 18 months now."

The trend of a rising yield signals a break in the decades-long bond bull market. As Maley notes, the downward trendline in yields was broken in late 2016. Bond yields have mostly held above that sloping trend line since then.

"That was the first indication that the trend was changing," said Maley. "The next spike we had just recently, that's taken it above the longer-term trend line going back multiple decades, and that's another indication that it's changing."

Maley says the 3 percent yield threshhold for bonds is critical for the Treasurys market. That marks a key resistance level for the 10-year. If bonds move above it, it would mean a new "higher-high" for the 10-year and confirmation longer-term trends in interest rates were shifting, he told CNBC.

The yield on the 10-year Treasury note has not reached above 3 percent in more than four years. Yields hit a year-to-date high of 2.95 percent on Feb. 21, a high not seen since January 2014.

The 10-year yield hit a session top of nearly 2.9 percent on Tuesday, its highest level in more than a week. The 2-year yield moved to a high of 2.332 percent the same day, a level not seen since September 2008.