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Bond Rate Rally Crushes Equities

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If the Fed didn't change its approach to stimulus, and it didn't, why are stocks getting taken to the woodshed? In the attached clip Jeff Kilburg, founder & CEO of KKM Financial and CNBC contributor, and Yahoo! Finance senior columnist Mike Santoli try to hash it out in real time in the wake of yesterday's post-Bernanke slide.

Speaking from the Chicago Mercantile Exchange, Kilburg immediately points to the bizarre, or at least unprecedented notion of the Federal Reserve speculating on government paper. "They have the ability to reduce or increase purchases," Kilburg notes. "Now all of the sudden we have the Fed day-trading the economy. That's scary."

Related: Fed Is Creating an Economic Illusion, Says Schiff

The market obviously agrees. In the immediate wake of Bernanke's presser the yield on the 10-year started moving higher in leaps and bounds. From 2.23% going into the announcement rates have spiked to just under 2.4% as of mid-day Thursday. It doesn't sound like much, but in the bond pits such spikes are enormous.

In theory, all assets are priced in relation to "risk free" government paper. That being the case, greater than 7% moves on the 10-year treasury create massive dislocations in the prices of any conceivable investment. Even cash. For better or worse there isn't anywhere to hide when the bond market gets off the train in crazy town.

"It's the disorderly sell-off in treasuries that's going to spook the stock market, not the economic environment that's driving the Fed at this point," Santoli notes.

That's a decent summation of what's ailing equities. What causes the selling to stop and how low stocks might fall are different and much more complicated questions.

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