Stocks Trip Over Tumbling Treasuries

Bond yields have been falling as the fed funds futures market has all but entirely wiped prospects of a fed funds rate cut from the 2007 calendar.

"There is a big re-evaluation going on now in the bond market with regards to the Fed," says Bill Hornbarger, senior fixed-income strategist at A.G. Edwards. "The fear is that the Fed is going to be more hawkish."

Indeed, the pendulum swung Thursday to reflect the possibility of rate hikes this year. The fed funds futures market prices in 1% odds of a rate hike at the March FOMC meeting, according to Miller Tabak. The futures market prices in 3% odds for a hike at the May meeting -- down from 3% odds of a cut as of Wednesday evening. In the span of about eight weeks, the market has retrenched more than 30% odds of a cut in March and a total of three rates cuts in 2007.

But Tony Crescenzi, Miller Tabak's chief Treasury strategist and a RealMoney.com contributor, notes that if odds of a rate hike tick up to 20% or 30%, the bond selloff would get much worse, and so would the equity market reaction. He also characterized Thursday's move as an "unfriendly" selloff. It wasn't sparked by relief that there's no recession. Rather, it was sparked by fears of inflation and rate hikes.