Ten-year Treasury yield approaches 4%

We are not yet at 4%, but the yield on the ten-year benchmark Treasury bond rose 6 basis points (0.06%) to 3.89%, the highest in over seven months as investors anticipate an economic recovery and grow fearful over the massive supply of debt that will be needed to finance huge budget deficits.

Expectations of an eventual economic recovery and higher Treasury rates kept the dollar on an upward trajectory, with  the Dollar Index, a measure of the US currency against a basket of six-major currencies, adding modestly to Friday's advance.  And the strength in the greenback put pressure on gold, which settled down by $10 per ounce to just over $950.

Stocks managed to overcome rate worries by the close and finished mixed.  But Friday's much smaller-than-expected decline in nonfarm payrolls is igniting talk that the Fed will soon be forced to begin hiking interest rates.

Fed funds futures according to Bloomberg are now pricing in a 32% chance that the Federal Reserve will hike its key lending rate to 0.50% by September.  And that's up from 16% a week ago.

Before we start discounting a rate increase by summer's end, let me remind you that sentiment among traders of fed funds futures can change dramatically based on incoming data.  Furthermore, I'd be very surprised if the Fed embarks on a campaign to hike interest rates while employment is still declining.

But Fed Chief Ben Bernanke is painfully aware that Greenspan and Company left rates too low for too long and then gradually raised the fed funds rate in quarter-point increments, which many blame exacerbated the housing bubble.

Bernanke does not want to sow the seeds of the next bubble by making the same mistake, but at the same time, he does not want to be accused of snuffing out a burgeoning recovery by hitting the brakes too quickly.