The yields on treasury bonds spiked up yesterday, in spite of a fairly good treasury auction. According to experts, holders of mortgage bonds are selling them and buyers on the other side are hedging by selling treasuries of appropriate duration.
As I have alluded to, mortgage spreads are at near historic lows and unlikely to tighten further. As a result any further rise in treasury yields will lead to higher mortgage rates. Higher mortgage rates reduce the value of existing mortgage bond holders who are now selling.
Equity markets reacted with a sharp sell-off. The action in the bond markets is likely to be a wake-up call to equity markets, especially the bulls. Though the market has been ignoring bad news for some time, higher yields will certainly derail any resurgence in economic growth and threaten the green shoots.
Disclosure: Long TBT Bearish Put Spread.