Stocks have been getting a boost from Santa, but not bonds.
As bonds sold off, the 10-year yield rose to 2.28 percent Wednesday, a key technical area traders have been watching. Traders await the $29 billion 7-year auction at 11:30 a.m. ET.
"The usual risk-on mood during the holidays may keep some investors away," wrote George Goncalves, head of rate strategy at Nomura. "If we do not see support come out for the auction, there is a risk that rates keep drifting up into year-end as dip buyers might try to optimize entry points at the start of a new calendar year versus now."
The stock market closes at 1 p.m. for the Christmas holiday, while bonds close at 2 p.m.
Stock futures were pointing higher Wednesday, after the Dow broke through and closed above 18,000 for the first time Tuesday. The closed at a record 2,082, just 18 points shy of 2,100.
"The Santa rally already started. It (S&P) moved 5 percent from last Thursday. Maybe it will digest a little bit in the next few days," said Scott Redler, partner with T3Live.com. "With low volume, digestion would be nice because that would reset the market for a potential move above 2,100 when the New Year starts."
As stocks rallied Tuesday, bonds sold off. Third-quarter GDP growth was revised to a stunning 5 percent, and November consumer spending was up a strong 0.6 percent. But durable goods surprised to the downside, and traders said the markets were more influenced by year-end positioning than any news.
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The late Tuesday was yielding 0.73 percent, the highest level since 2011. The yield was slightly lower Wednesday, but the two-year has also been selling off on the anticipation of Fed rate hikes next year.
"Two-years tend to lead short-term rates higher when it anticipates that the Fed is going to begin to tighten," said Ward McCarthy, chief financial economist at Jefferies. "You can see it in some of the bills."
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As for stocks, traders say they could continue to drift higher on year-end buying. Weekly jobless claims data, released at 8:30 a.m. ET were better than expected, with claims at 280,000.
Weekly mortgage applications were also reported Wendnesday. Total mortgage application volume for the week ending Dec. 19 rose 0.9 percent on a seasonally adjusted week-over-week basis, according to data released Wednesday by the Mortgage Bankers Association.
Stock traders are also watching oil, which has been losing ground Wednesday ahead of U.S. inventory data at 10:30 a.m. API data late Tuesday showed a surprise 5.4 million barrel build.
Traders say oil has decoupled from stocks for now, and the key is whether oil holds the low from week, at around $54 per barrel for West Texas Intermediate futures. WTI futures were trading at $55.90 Wednesday morning, off 2.1 percent.