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The 10-year yield is getting close to 3 percent, and that is a level that could set off alarm bells for investors.
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Bank of America Merrill Lynch studied the relationship between higher yields and stocks and found the correlation is inconsistent and stocks have not been really hurt in periods of higher rates.
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Markets flip-flopped and stocks sold off sharply Wednesday after bond yields rose in response to the Fed's meeting minutes.
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Now markets are hyper-focused on all Fed speak and will be paying close attention to New York Fed President William Dudley on Thursday morning.
The 10-year Treasury yield is getting dangerously close to 3 percent, a level that some say will set off serious alarm bells for some stock investors.
While the entire Treasury market is moving, the 10-year is the benchmark, the rate most widely watched by investors and the one tied to a whole range of business and consumer loans, including mortgages. On Wednesday, it rose to a fresh four-year high of 2.957 percent, and that helped turn a strong stock market rally after the Fed minutes into a bloodbath. The Dow closed down 166 points at 24,797.
That puts the focus again on the bond market Thursday and the events that could impact trading. That would include an appearance by New York Fed President William Dudley on Thursday morning and a 7-year bond auction Thursday afternoon.
The 3 percent level does not necessarily have to stop the stock market's bull run, but it is a level where the probability for losses in the S&P 500 increases, according to a new report from Bank of America Merrill Lynch.
"You're on the cusp of leaving the sweet spot, but that being said, the rising rates are not necessarily bad for the stock market. Yes, from your finance courses, a higher discount rate means you're going to see lower valuations, all else being equal. But the 'all else being equal' missing ingredient is a high growth rate," said Marc Pouey, equity and quant strategist at BofAML.
Pouey said the "sweet spot" for stocks is a 10-year yield between 2 and 3 percent, but the fact that not only U.S. growth but global economic growth is strong makes it more likely that stocks will be able to positively navigate a zone where the 10-year is above 3 percent.
"There is no magic number. You have periods of positive correlations and periods of negative correlations," Pouey said.
Treasury strategists say the 10-year could make a quick run toward 3 percent and could do that as more information comes out from the Fed. The Fed did not tip its hand, in the January meeting's minutes, as to whether it would raise rates more than the three times forecast. But some Fed watchers viewed the comments in the minutes as being more confident about the path they are on. After its March meeting, the Fed will release new projections for rate hikes and the economy.