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Art Cashin: Once the 10-year yield hits 3% 'all hell' could break loose

Berkeley Lovelace Jr.

It could be a bad day for the markets once the yield on the benchmark 10-year Treasury hits 3 percent, closely followed trader Art Cashin told CNBC on Thursday.

"That 3 percent level is both a target and a kind of resistance. Everybody knows it's like touching the third rail," said Cashin, UBS director of floor operations at the New York Stock Exchange. "The assumption is once they do it, all hell will break loose. So we'll wait and see."

As of early Thursday, the 10-year yield was slightly lower , around 2.91 percent, down from Wednesday's four-year high of 2.95 percent. Wall Street fears returned Wednesday afternoon after minutes from the Federal Reserve 's latest meeting sent bond yields rising and stocks into a tailspin. The last time the 10-year yield traded above 3 percent was in January 2014.

"Initially, yields moved down, stocks rallied like crazy," Cashin recalled about Wednesday, moments after the Fed minutes. "Then about 8 minutes into that move, stocks looked back and noticed bonds had changed their mind."

The sharp moves seen on Wednesday were probably due to "our friends, the long-lost 'bond vigilantes,'" Cashin told " Squawk on the Street ."

The term " bond vigilantes " was a term coined by market historian Ed Yardeni during the 1980s, referring to traders who sell their holdings in an effort to enforce what they consider fiscal discipline. Selling bonds sends yields higher due to the inverse relationship between bond prices and bond yields.

"We're going to need a couple weeks to see if the 'bond vigilantes' really are back or not," Cashin said. "Or whether it was simply a fluke. But remembering what 'bond vigilantes' look like, it certainly had finger prints on them."

U.S. stocks ended their session lower Wednesday, with the Dow Jones industrial average closing down nearly 167 points after rising more than 300 points earlier in the day.

The stock market had gotten off to a roaring strong start in January after rallying in 2017.

But stocks tanked in early February after a higher-than-expected wage number in January's jobs report sparked fears of inflation and rising rates. Stocks on a closing basis eventually bottomed out on Feb. 8, briefly plunging into 10 percent correction territory. The market had been up for six-straight sessions before declines on Tuesday and Wednesday.