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Investments in U.S. bond funds surged to their highest level in nine weeks in the week ended April 7, helped by a retreat in bond yields, which saw a strong rally in the first quarter. U.S. bond funds saw $13.7 billion in inflows. This inflow was mainly driven by U.S short- and intermediate-term investment-grade funds, which had net purchases of about $5.1 billion, the biggest in seven weeks.

The sharp rise in bond yields is forcing traders to consider that they may be holding two irreconcilable ideas in their heads. One is that the Federal Reserve has no real control over bond market interest rates. The other is that the Fed can keep the stock market aloft as long as it tries to control interest rates.

The resilience of share prices — the S&P 500 rose 5.8 percent in the first quarter — suggests that those two ideas can coexist. But if yields continue to rise, the impact on companies, consumers and homeowners and the appeal that fatter bond yields may have to investors could produce a reckoning for stocks.

How abrupt the rise in yields will be, and when the stock market bears the brunt of it, could depend on the breaching of certain levels of interest rates .It usually takes a while before rising yields lead to deterioration in stocks.

As long as economy continues to improve, bond yields will not be a real problem, but it’s important for the increase to be gentle. The level where equities get a real problem around 2.5 percent yield. Watch out!

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