10-Year Treasury Auction Drives Yields Up

"Mortgage rates are going to continue to go up unless the Federal Reserve decides to increase its purchases," Pavlik said. "But lower mortgage rates will only have a tame effect on the recovery efforts in the housing market."

Pavlik said that the high yield of 3.99% is likely why the bid-to-cover ratio "was at least decent," and is also the reason behind the spike higher in yields. "But at the same time, when you get close to 4% on yields, you see a steep drop in the market like we saw," he said.

He characterized the number of indirect bidders as "good," saying it indicates "there is still foreign interest in these bonds." However, he said the interest comes at such a high yield that the only way for bond yields to go now is up.

"The market at this point can still deal with 4%," he added. "What can really counterbalance that higher interest rate is an improving economy."