The march to a yield of 2.7% on the 10-year Treasury has set off nervous market chatter–and a retreat in stock prices today

When is high too high?

The U.S. stock market has been a real champ at sailing past the prospect of higher interest rates to new high after new high.

But the march of the yield on the 10-year U.S. Treasury has led to a pause for thought among traders and investors.

The yield on the 10-year climbed to 2.71% this morning. The dollar fell again with the Dollar Spot Index (DXY) falling 0.22% to 89.112. Oil retreated as West Texas Intermediate fell 2.09% to $64.19 a barrel.

And, most noticeably, U.S. stocks retreated with the Dow Jones Industrial Average down by 1.04% and the Standard & Poor’s 500 off 0.78%.

One reason for what could be a pause or the start of some deeper decline is that no one is sure what this moment means. To use a phrase from the years of the Janet Yellen Federal Reserve, it’s “data dependent.” The consensus on Wall Street, right now, is that 3.00%  on the 10-year Treasury would put the market at risk of something more than a pause. “Around 2.9 or 3 percent on the 10-year is where we begin to run into trouble,” Peter Tchir, head of macro strategy at Academy Securities, told Bloomberg. “All of this is about the speed of the adjustment. If we are at 3% by the end of this week, I don’t see stocks surviving that very well. And rising yields already make it harder for some dividend stocks to do so well.”

I can’t find very many analysts and economists looking for 3% by the end of the week, but a 3% yield on the 10-year farther down the road isn’t out of the question. The yield on the 10-year Treasury is up 31 basis points (100 basis points make up a percentage point) in the last month. Another 30 basis points would take the yield above 3% from this morning’s 2.71%.

I can see two sources of worry about that possibility.

First, on Monday, as scheduled, the U.S. Treasury announced its schedule for selling Treasury debt this quarter: Total anticipated sales come to $441 billion this quarter. That’s the most in quarterly sales in eight years. And selling that many notes and bonds is going to require higher yields on Treasuries.

Second, much of the pressure today on stocks and in the last month on Treasuries is coming from overseas investors who are asking for higher yields in the face of a huge schedule of U.S. debt sales, worries over a declining dollar, and skepticism about the Trump administration’s claims that the recent tax cuts will generate enough growth–without an uptick in inflation–to put billions in new revenue into the Federal coffers. The inability of Congress to strike a deal to fund the operations of the government for more than a few weeks–the newest deadline is February 8–and the continued possibility that the failure to raise the U.S. debt ceiling will make it impossible for the U.S. to meet its obligations to bond holders sometime in March aren’t exactly increasing confidence among overseas investors.

In the very short term, the market also seems to be worried about the earnings reports coming in the next few days from technology giants such as Apple (AAPL), Facebook (FB), Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOG). These stocks have been the drivers of the stock market rally in the last six months and there’s some concern that the results on Wednesday and Thursday won’t justify even higher valuations on these already highly valued stocks.

That worry about the shares of technology giants will get resolved one way or another this week. My opinion is that any disappointment in earnings will lead to a dip that will generate new buying in fairly quick order. If a dip doesn’t lead to buying, then we will have broken the pattern of this long, long rally and it will be time to reconsider everything.

The bigger danger, I think, is in the bond markets where the rally in high-yield (aka “junk”) bonds that began the year has come to an abrupt halt. A move in the 10-year yield to 3% this quarter would wipe out half of the expected returns for high yield bonds, Marty Fridson, chief investment officer at Lehman Livian Fridson Advisors told Bloomberg yesterday. The other market that seems to be generating raised eyebrows is the $3.8 trillion U.S. municipal bond market. So far this year these bonds have tracked the 10-year Treasury. But there’s no guarantee that municipal bonds will continue to track Treasuries if Treasury yields spring higher.