The recent pop in interest rates: This could be a game changer for financial markets as the U.S. Treasury bond market is, by far, the largest and most influential in the world. Last week, 10-year Treasuries jumped to 2.1% on Friday, up from 1.6% at the beginning of the month. After a long period of low interest rates, U.S. equity markets are addicted to easy, cheap money and a change in that environment could add to the cost of doing business for corporations, damp the much-ballyhooed real estate resurgence and have the ominous effect of effectively increasing the national debt as rising interest rates make the debt more expensive. Overall, the move in interest rates leaves investors in a bad place, with growing potential risks appearing in both the stock and bond markets. On Friday, stocks and bond prices declined in unison, which is not the typical action: Usually, stock and bond prices move inversely to each other. If stock prices and bond prices start going down together, this potentially sets up an environment in which a diversified portfolio of stocks and bonds could move up or down in tandem. The biggest risk here is the Fed easy money policy has created three simultaneous bubbles in stocks, bonds and real estate and all three could deflate concurrently if/when the easy money is pulled away. Any hint the Fed is losing control of the interest rate environment is likely to lead to extreme volatility and the potential for significant problems for stocks, bonds and real estate, much like the current situation in Japan.
U.S. markets now face several significant challenges that could easily bring on a bout of June doom and gloom. The recent rally has been completely unhinged from economic reality, as macro indicators like consumer spending and commodity prices point to a slowing global economy and technical indicators point to potential upcoming weakness in major U.S. markets. U.S. corporations are starting to show signs of stress and an atmosphere of rising interest rates adds further uncertainty to the overall picture for June. Wall Street Sector Selector remains in "red flag" status, expecting an increasingly high risk environment ahead. At the time of publication the author had no position in any of the stocks mentioned.Follow @WSSectorSelectThis article is commentary by an independent contributor, separate from TheStreet's regular news coverage.