Stocks slip as the 10-year yield hits 5.23%; the 2-year now sits a full point above the Fed's rate

U.S. stocks fell at midday Monday as Treasury yields pushed back toward their highest levels since 2007. The S&P 500 was down about 0.6% near 7,699 at 12:52 p.m. ET, the Nasdaq 100 was off about 1% and the Dow was down about 0.5%, according to the index feeds on our markets page. The Russell 2000 of smaller companies fell about 0.8%.

The indexes came off their lows around midday after CNN and Axios reported, citing White House officials, that President Trump was open to sanctions relief for Iran tied to nuclear progress, CNBC reported. That pulled crude back from its highs. WTI was near $96.24 a barrel and Brent near $102.23 at the same capture.

What led the decline

AI-linked shares did most of the damage. CNBC reported Advanced Micro Devices down about 5% and Micron about 4%, with Microsoft off 2% and Meta Platforms down roughly 4% after a 13% gain last week. Nvidia went the other way, up about 2%, after it added $150 billion to its buyback (our breakdown of that plan).

CNBC put the 10-year Treasury yield up nearly 5 basis points at 5.23%, the 30-year at 5.544% and the 2-year up more than 5 basis points at 4.918%. The 10-year touched its highest level since June 2007 last Thursday.

The number behind the number: the 2-year versus the Fed

The yield that says the most about the Fed is the 2-year, and it now sits about a full percentage point above the overnight rate. The effective federal funds rate was 3.88% in the FRED series on our markets board. A 2-year yield of 4.918% is 1.04 percentage points above that. Investors would only accept locking up money for two years at the overnight rate plus a point if they expect the overnight rate itself to keep rising, which is how traders are reading a Fed that has started a new hiking cycle.

The move has also been fast. On the Treasury's own daily yield curve, the 2-year closed at 4.67% on Sept. 17 and 4.81% on Sept. 25. Monday's intraday 4.918% puts it about a quarter of a point higher than 11 days ago. The 10-year closed at 4.94% on Sept. 17, so Monday's 5.23% is 29 basis points higher.

What the flat-looking index hides

A 0.6% dip in the S&P 500 with the 10-year at a 19-year high looks like the stock market shrugging. It is not the full picture. A Deutsche Bank note quoted by CNBC said mega-cap growth and tech stocks are up 14% since the end of July to a record, while the rest of the S&P 500 is down 3% over the same stretch and has lost 5.5% in the last five weeks. The index is being held up by a handful of very large companies; the typical stock has been absorbing the rate move for more than a month.

For a business owner, the rate that matters is closer to home. Freddie Mac's 30-year mortgage average was 7.03% last Thursday, up from 6.71% on Sept. 3. On a $400,000 loan, that is about $2,669 a month in principal and interest versus $2,584, roughly $86 more, and Thursday's survey will not yet reflect this week's move in yields. Anyone pricing an equipment loan, a building purchase or a line renewal this month is doing it against a benchmark that has not been this high since before the 2008 crisis.

What traders are watching

Job openings are due Tuesday, the August PCE price index Wednesday, and the September payrolls report Friday, with forecasts on our calendar at 84,000 jobs and a 4.1% unemployment rate. Mohamed El-Erian told CNBC he expects the 10-year to stay around 5% even if oil falls, citing an imbalance between the supply of long-term bonds and demand for them. Rate charts are on our 10-year page.

Sources: CNBC markets live blog, CNBC Treasury report, U.S. Treasury daily par yield curve, Freddie Mac PMMS, FRED. Index and commodity levels captured 12:52 p.m. ET and will change. Spread and payment arithmetic is ours. This is market information, not investment advice.