Stocks Trip Over Tumbling Treasuries

Stock traders often think bond traders know something they don't -- that they're smarter, or more in tune with the macroeconomic story of the day.

Over the past several months, stock investors have overturned that myth, rallying the major indices in the face of an inverted yield curve and betting on a soft landing for the economy.

The stock market was right. The slowdown came and went with a blink in the third quarter of 2006. Inflation simmered down, and fourth-quarter growth estimates ratcheted back up on rising exports, a robust labor market and unbreakable consumer spending.

So as the stock market rode Goldilocks' coattails to more new highs this month, the bond market tried to play leapfrog and get one step ahead: Bond traders are concerned about an overheating economy, inflation, and possible fed fund rate hikes.

The 10-year Treasury note broke down in price and broke through a key technical resistance yield level of 4.85% Thursday to close at 4.87%. And, the stock market finally woke up, took notice and got worried.

The Dow Jones Industrial Average slumped 0.9% Thursday to close at 12,502.56. The S&P 500 fell 1.1% to close at 1423.90 and the tech-heavy Nasdaq Composite shed 1.3% to close at 2434.24.

"A 5% yield [on the 10-year note] is right around the corner," says Marc Pado, chief market strategist for Cantor Fitzgerald. "It's about time the bond market selloff is starting to impact the stock market."