Stocks Trip Over Tumbling Treasuries

As of now, the 10-year note has retraced 50% of its initial drop from its July 2006 high of 5.25%. The 4.85% level was the 10-year's 200-day moving average for yield, and a level the market had been unable to penetrate since last summer. The market rallied back after testing 4.85% in intraday trading in both August and October of 2006.

Traders also note that foreign demand for longer-dated Treasury bonds may be starting to wane. Foreign buying by central banks and private institutions (including OPEC nations that collect oil revenue in dollars) has been another key factor that has helped keep interest rates low and fueled the stock market's rally.

Indeed, the five-year Treasury note auction Thursday reflected weaker-than-average demand from foreign buyers, notes Pado. Over recent weeks, Asian bidders stepped in to buy bonds when the 10-year yield reached 4.80% intraday. That bid hasn't come through this week.

Overall, higher bond yields drive up the cost of borrowing for both consumers and corporations, slow the economy, and hurt profits and overleveraged people and businesses. In the case of this economic cycle, low interest rates have kept corporate defaults extremely low, consumer credit conditions amenable and liquidity plentiful.

Under the shadow of interest rate woes, earnings season looks even less sparkling. Investors have been coping with weak guidance from many of America's chief executives, and the fourth quarter is shaping up to break the streak of 13 quarters of double-digit earnings growth.