The markets waltzed to the old asset allocation tune Monday.

The 10-year Treasury bond yield opened Monday approaching 5%, which worried stock market participants that certain investors would take stock profits and move their money into bonds. The notion ended up pushing down bond yields in the second half of the day as stocks lifted back up to end the day in the green.

The Dow Jones Industrial Average ended the day up a fraction to close at 13,676.32, while the S&P 500 and the Nasdaq Composite closed up 0.2% to 1539.18 and 2618.29, respectively.

"There wasn't a single negative in last week's economic news," says Marc Pado, chief market analyst at Cantor Fitzgerald. "The only negative was that interest rates ticked up, but for the right reasons," he says, noting that jobs growth is strong, manufacturing is coming back, and inflation is low. But 5% on the 10-year Treasury bond is a potential "safety threshold," he says.

The 10-year Treasury bond initially rose, but ended the day down at 4.93%. It closed Friday at 4.96%.

The same type of decision-making may be going on in China, where the Shanghai Composite dropped 8.3% Monday. The plunge, its second of such magnitude this year, didn't damage global stock market indices the way the first one did in late February.

Back then, investors feared the plunge would dry up investors' appetite for risk and suck liquidity out of the global marketplace.

This time around, the drop didn't rattle investors. Other markets barely reacted to the news from China, and even its closest neighbor and home to many dually-listed Chinese shares, Hong Kong's Hang Seng index, gained 0.6% on the day.

The lack of correlation between the Hang Seng and the Shanghai Composite also could be due to some asset reallocation going on, says Winston Ma, author of "Investing in China: New Opportunities In A Transforming Stock Market."

While the Chinese government restricts investment in foreign markets, due to physical proximity, some investors are able to take profits in China, exchange their money into Hong Kong dollars to invest in that market, says Ma. The Bank of China stock on the Shanghai Composite has fallen more than 9% since Friday; it was a fraction higher in Hong Kong, notes Ma.

The lack of correlation underscores how isolated China's stock market bubble is.

"People realize that it is a really independent market," says Ma. "The trading volatility in such a closed-end system shouldn't have an impact on the broad global markets."

The diminishing China impact is reminiscent of the market's fear that Japan's hiking interest rates would suck global liquidity out of the markets. Japan took pains to signal to the world that it would tighten liquidity and eventually hike its overnight borrowing rate from 0%. But when it finally did end its quantitative easing policy in spring 2006, investors ratcheted back their risk-appetite. Global stock markets plunged.

Later that summer, when Japan actually raised its interest rate, the impact was minimal, and the carry trade continued on nearly unencumbered.

In China's case, the government has taken pains to repeatedly notify investors that it will attempt to stem rampant speculation. In February, the spark for China's selloff was that it instituted higher bank reserve requirements, and officials jawboned that "speculation will only cause bubbles, which will burst."

This time around, Chinese officials increased the so-called stamp tax on stock transactions. Ma notes that the increase announced last week was minimal, but the message may have been heard on the domestic front.

He explains that the stock market there has an automatic stop-loss feature built in so that no stock can fall more than 10% in a single day, so it's anyone's guess how far China could have plunged.

Until now, investors were pouring their money into the stock market believing that "the support of their purchase today comes from all the new money coming in tomorrow."

If stocks in China continue to fall, the world's markets might take more notice once again, say Ma and Pado.

"There'll be some residual negative if this is the bubble bursting in China," says Pado. Whoever is invested in China is also invested in other speculative markets around the globe, and any huge risk-aversion moment has the potential to cause contagion, he says.

In the meantime, the bullish tone prevails as merger and acquisition activity lit up the news again Monday, putting a floor under any selloff. Some of the buyout boom Monday came from unusual suspects -- technology and subprime lending.

PDA-maker Palm ( PALM) agreed to a 25% stake to private equity firm Elevation Partners. Telecommunications-equipment maker Avaya ( AV) is reported to be a target of private-equity firm Texas Pacific Group and Silver Lake Partners. Shares rose 9.2% and 4%, respectively.

In the subprime space, Accredited Home Lenders ( LEND) agreed to be taken private by Lone Star Funds, while Citadel Investment Group agreed to buy the bankrupt lender ResMae.

Other deals of note include:
  • Dominion Resources (D) selling most of its U.S. onshore natural gas, oil exploration and production operations in two separate transactions to Loews ( LTR) and XTO Energy ( XTO) for about $6.5 billion;
  • Solectron ( SLR) agreeing to be acquired by Flextronics International (FLEX) $3.6 billion deal;
  • Netherlands-based diagnostic-products maker Qiagen (QGEN - Get Report) purchasing Digene ( DIGE), which makes gene-based medical tests, for about $1.6 billion.

On Monday, M&A trumped China. But with Fed Chairman Ben Bernanke on tap to speak Tuesday, some residual -- perhaps warranted -- jitters still may be in the air. Bernanke's speech at the same International Monetary Conference last year caused a 199-point drop in the Dow. With the theme of worry about Asia draining liquidity from the globe in place, his likely hawkish words could stall U.S. stocks once again -- unless he too has lost the ability to spook the bulls.

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In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.