Flat rates have gone up. That could soon put a dentist in stocks.

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Flat rates came off last week as investors became more confident in economic recovery. One problem: Stocks may not be prepared for raising.

The yield on 10-year Finance debt rose to 1.1% by Friday from 0.91% to the end of Monday. With Democrats winning control of the Senate, Congress appears to have agreed to spend at least a few hundred billion more dollars to stimulate the economy. That means better growth and slightly higher inflation could appear. Bond yields reflect these expectations.

“The reason they are [rates] spike is expected to inspire, ”said JJ Kinahan, TD Ameritrade’s chief market strategist Barron’s. “Are we set for inflation?”

A gradually higher movement in flat rates is generally seen as a sign of hope, but a sudden return – or one for which the market is not yet visible – could be a problem for stocks. Higher interest rates put pressure on stock valuations as they erode the value of future corporate profits.

And valuations are high at the moment, a reflection of how historically low interest rates have fallen. Stocks in S&P 500 will trade at an average of just under 23 times the earnings for the coming year, well above the long-term average of about 15 times.

“Even 10-year US bond yields now just over 1% could be enough to hit that tense point where the market bubble will burst,” wrote Albert Edwards, before global innovation at

Société Générale.

The Federal Reserve is plowing money into the bond market to keep prices high and interest rates low to stimulate the economy, but Edwards, who is known for his sustained bearish views, may not even be able to Fed stop the blowing.

Even with the rise in yield, investors have been paying a higher price for stocks. The

S&P 500

Friday ended up 3.3% from Monday’s closing rate.

Valuations, although stretched by some, may be said to be at nose levels. At current prices, the main price of equity risk is S&P 500 – the earnings provided by the average stock in the index include in addition to what investors would receive from maintaining debt Finance 10- safe year – at 3.27%. The price is often high above 3%, indicating that valuations are not out of control.

At the same time, however, it rarely falls below 3%, and when it does, stocks often fall. Edwards says in his report that data shows bond yields are set to increase. If earnings on stocks did not rise accordingly, that would mean a narrower risk price.

He said yields on 10-year Finance debt tend to rise and fall along with movements in the Supply Management Purchasing Manager’s Index, or PMI, for manufacturing. And that measure recently hit around 60, the highest level since 1995. That should be linked to a 1.2-percentage point increase in 10-year yields.

If rates were to rise so rapidly, without the gain in employment that would result in a higher PMI and a typically stronger economy, stock valuations would fall.

Watch levels.

Write to Jacob Sonenshine at [email protected]