Two years yields now at 2.71%

Very quietly (at least from the brokers), without much fanfare, the two-year US Treasuries yields have surged from the lows of 1.31% to 2.71%.



Keep in mind that the rally is way before the Fed Chairman Ben Bernanke made the notorious speech of "strong US dollar." That bode ill to the equity. Something is at work here. Global investors keep pouring money into the commodity sector, pushing up the price of crude oil. That invariably would trigger the inflation expectation backlash. And make no mistakes, global central banks are working 24 hours a day to raise interest rates.

But the wild card would be the Federal Reserve. Though the market is pricing in the rally of the US Treasuries yield, how far is Fed Chairman going to go on interest rate? I bet Fed wouldn't derail the recapitalization of US banks by jacking up the short-term rate too high. Nevertheless, the process of recapitalization would go slow. And that would pressure the banks indirectly since they need to offer higher interest rate if they are in need of money. That means the talk of the town - the perpetuals of the megabanks - are not attractive anymore.