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U.S. 10-Year Treasury: The Most Important Market Indicator

The yield on the U.S. 10-year Treasury bond tells you all you need to know about the markets. The Dow, the S&P 500 and NASDAQ are all secondary indicators, particularly when U.S. stocks are largely taking their cue from events overseas. In the attached clip, trader Jeff Kilburg explains why.

"(The 10-year) represents fear in the market as European fears persist," says the CNBC contributor. At times of duress, investors turn to the safety of U.S. debt and away from risk assets or the paper issued by more suspect governments. Say what you will about the questionable economic outlook and policies of the U.S.; the country pays its bills.

It's the reliability rather than the return. As of Monday morning U.S. 10-year bonds were yielding 1.63%, down for the day despite a $125b bailout of Spanish banks over the weekend. The deal was supposed to make the economy of Spain safer for investment by outside money. It made for a nice theory but it's not happening as U.S. yields have barely budged despite being near record lows.

Rate cuts are intended to force investors into higher risk assets to get returns. According to Kilburg, investors are almost oblivious to how much they're making. They just want to make sure they get their money back. "It's not about the yield, it's about being able to sleep at night."

Despite the advantage of not having to pay much of anything to borrow money, the government would prefer rates be higher. Rates under 2% destroy the value of saved money and crush those on fixed incomes who don't have the option of stepping out on the risk curve. The U.S. can drop rates, but only demand can push rates higher. Right now rates are stuck at levels previously thought impossible. To traders that means the risk aversion trade is still on, no matter what equities tell you from day to day.

Kilburg thinks rates are going to go lower before they go higher, suggesting more bumpy times for stock players. "The stock market is going to be on sale for the rest of the summer," he insists. What happens to stocks in the Fall will likely depend on what's going on in Treasuries.