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Bond yields down as investors move to safe haven instruments

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As a result, the bumpy ride for stocks could continue for a while. The Bank of England raised its growth forecasts for Britain due to the strong global recovery.

The rise in Treasury yields pushed VIX's bond-market cousin (TYVIX) to its highest since April, while a measure of currency volatility is also near its highest level since April.

At its worst, the S&P 500 fell Monday to a low of 2,637, a decline of more than 100 points, before closing at 2,648, a drop of 4.1 percent, its worse day since August, 2011. Furthermore, the sharp rise in USA yields has come at a time when U.S. economic data releases have been more mixed, with the exception of January's United States employment report.

Traders are now putting the chances of a 25 basis point hike by the Fed at its March meeting at 84.5 percent, according to Thomson Reuters data.

Additionally, Senate leaders announced that they had reached a two-year budget agreement Wednesday afternoon. Cabana said it was encouraging in that the deal was bipartisan and that means the debt ceiling won't be an issue.

"It signals that fiscal austerity out of a thing of the past, and Republicans aren't almost as concerned with the overall trajectory of the deficit as they have been and the president is anxious about it", he said.

Next week, coming off one of the most volatile stretches in years, two important readings on USA inflation could help determine whether the stock market begins to settle or if another bout of volatility is in store.

The selling was fuelled also by profit-taking after a blistering January that saw several indexes strike record or multi-year highs, while energy firms were hit by a drop in oil prices. The more the bond yields rise, the more will be this opportunity cost.

"We're in a vicious cycle here".

"This is how we started, go back to Friday and this is exactly where we were", said Art Hogan, chief market strategist at B. Riley FBR in NY.

Managers have cautioned the sell-off in bond and equity markets has further to run, pointing to the impact of the withdrawal of central bank stimulus and even a potential stagflationary environment developing.

"It's as correlated as it's ever been to anything", said Hogan. To fight inflation, central banks go hawkish on interest rates.

To get to where stock yields were relative to bonds before the financial crisis, 10-year Treasury yields would have to rise to 4.2 percent, or stocks would have to rise an additional 35 percent, or to roughly 35,000 on the Dow, not factoring in earnings, which have recently been rising in the double digits.

Attractive yields on a safer investment have made stocks suddenly less attractive.

"What's the right multiple you're willing to pay?..." The notes ended down 6/32 in price to yield 2.853 percent.

"In the day of the 5 percent 10-year, the average P/E was 15.5", he said.

Straightforwardly, rising 10-year rates are a bullish signal for the economy: demand for money is rising, businesses want to put it to use.

Nothing points to bonds suffering a calamity such as the stock market experienced after Lehman Brothers' 2008 collapse. The comments were highly unusual for a Treasury secretary and came on top of new protectionist tariffs on solar panels and washing machines - and thus seen as part of a bigger policy agenda.

Rising inflation isn't always a bad thing. "Once we find that new range and understand the tolerances, then it's back to business as usual".

The MSCI Emerging Market Index fell 0.5 percent. But with the yield topping 2.88 percent Thursday and the S&P down 7 percent in the past week, stocks are already uncomfortable.

(In a six-month span, the S&P 500 fell 45%.) Gross himself says the bond bear market will be a "mild" one. That would make 3 percent the next stop.

"The U.S. economy is on solid foundation", said ClearBridge's Schulze. That could be another influence overnight.