Despite Moody's claiming the US's Triple-A rating was stable, the markets sold off today. The markets tried to hold up but the afternoon session was marked by selling as bond yields rose on the long-end of the curve. The 10-Year Treasury yield was up 20 basis points to 3.697% and the 30-Year Treasury yield was up 16 basis points to 4.60%.

Here were the unofficial closing bell levels:

Dow 8,300.98 -172.51 (-2.04%)
S&P 500 893.13 -17.20 (-1.89%)
Nasdaq 1,731.08 -19.35 (-1.11%)

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This strategy went from being a modestly successful trade through October to a hero-sized trade in the past 45 days.

The Fed funds rate, the most widely followed interest rate the banks charge each other for overnight lending, topped out in August 2006, at 5.25%.

When the Fed started easing rates thereafter, no one at the economic think tanks forecasted anything close to what we are seeing today (namely a Fed funds rate of zero to 0.25% -- a decline of a full 5% in 17 months).

The decline in rates started out so orderly and coordinated that it seemed almost too good to be true, and the Dow Jones Industrial Average hit an all-time high, topping 14,000 for the first time in July 2007.

However, the quarter-point cuts gave way to a three-quarter-point cut, or 75 basis points, on Jan. 22, 2008, signaling that the Fed was seeing a material breakdown in the credit and housing markets. Following that seemingly radical rate cut, just eight days later on Jan. 30, the Fed again slashed the Fed funds rate by another half point, or 50 basis points, to 3%.

From there Bernanke & Co. held steady for a couple months to see if any good would come of their efforts.

When evidence of further erosion in the credit markets surfaced with the impending collapse of Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), Indy Mac, Bear Streans and Lehman Brothers (OTC: LEHMQ), the Fed lopped another three-quarters of a point off the Fed funds rate, taking it down to 2.25% on March 18.

That was considered the absolute floor at the time, a level that would stick. But that wasn't the case.

With bond prices dropping and interest rates going higher on the 10-year bond, reports of inflation being too high are becoming more pervasive. Indications inflation has moved out of the Fed's targeted range of 1% to 2% suggest it must move aggressively to keep inflation in check.

However, the reality is there is little truth to that range. If you go back and look at periods of excellent economic prosperity, both domestically and internationally, such as from 1950 to 1968 and again during the 1990s, inflation averaged around 2.5%. For some reason, when U.S. inflation averages around this level, both the U.S. and international economies do very well.

What was inflation in April (the latest data point on the CPI webpage)? 2.6%. Right in line with periods of great prosperity.

However, historically, real interest rates can range from 3% to 4% for more long-dated bonds. What have real interest rates been recently, very low at 1.5% to 2.0%. Typically, adding inflation and real interest rates gives a range for long-term bonds. This would imply interest rates of 5.5% to 6.5%. Bonds have been expensive for a long time, providing little risk premia for fixed income investors.

Bonds are tremendously oversold and are worth trading for the short term. But more importantly, do not dump stocks because bond yields are going higher. Stocks are still very cheap relative to bonds. Bonds, historically speaking, are overvalued, not stocks.

Lately, commentators have noted that U.S. long-term interest rates are on the rise. As of today, the yield on the 10-year Treasury note is hovering just below its late-January closing peak of 4.89%.

Yet this is not a purely domestic phenomenon. The same also holds true for bond markets around the world.

In each of seven selected international markets -- Europe, Switzerland, United Kingdom, Japan, Canada, Australia, and Hong Kong -- 10-year interest rates are at or near 2007 peaks. In four of them -- Europe, Switzerland, United Kingdom, and Australia -- long-term yields are not far off 12-month highs.

Amid signs that many central banks outside the U.S. are also poised to boost short-term rates in their own countries, some might say that the monetary environment is becoming less supportive for share prices.

So much for excess global liquidity?

Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle: An Insider's Guide to Successful Investing in a Changing World.