Treasuries tumbled with gold and the dollar rallied, while U.S. equities retreated, as concern grew that the Federal Reserve will scale back its stimulus efforts if the labor market continues to improve.

Ten-year Treasury yields jumped 10 basis points to 2.03 percent at 3:14 p.m. in New York, topping 2 percent for the first time since March. The Dollar Index rose 0.6 percent to 84.35, trading near its strongest level since 2010. The Standard & Poor's 500 Index lost 0.7 percent at 1,656.79, retreating from a record after climbing as much as 1.1 percent earlier. Gold futures retreated 1.4 percent to $1,359.00 an ounce, after rising as much as 2.6 percent.

U.S. stocks extended gains earlier while gold and Treasuries rallied as Fed Chairman Ben S. Bernanke told Congress that a premature end to its bond buying would put the economic recovery at risk. Treasuries and gold turned lower as Bernanke later told lawmakers that the flow of purchases will slow as the employment outlook “improves in a real and sustainable way.” A number of officials said they were willing to taper stimulus as early as June, minutes from the Fed's last meeting showed.

Eoin Treacy's view The Fed has told us that they are looking at the unemployment rate as one of their key objectives for improvement. They have also told us that they are aiming for a higher inflation rate in order to confirm their victory over deflationary pressures. At present neither of these objectives has been achieved to their satisfaction but progress has been made.

Let's not forget that the housing and credit bubbles were at least in part fuelled by the Fed's failure to withdraw stimulus quickly enough as the economy recovered after the Nasdaq crash. They will be keen to avoid a similar mistake on this occasion. Considering just how large the monetary accommodation has been Mr. Bernanke is obviously wary of leaving a sea of liquidity run unchecked when growth returns to a self- sustaining footing. It is therefore logical that the scale of accommodation be tailed back as the economic outlook improves.

US 10-year yields have rallied from 1.6% to test the 2% area this month. A sustained move above 2.1% would be the first indication of a return to supply dominance beyond the short-term. (Also see David's comment on Monday). http://www.fullermoney.com/x/default.html?id=3951

The S&P 500 Index has rallied for 20 of the last 25 sessions, has developed a short-term overbought condition, is approximately 11.5% overextended relative to the 200-day MA and posted a downside key day reversal by today's close. A peak of at least near-term significance has been reached while a pull back below 1600 would suggest mean reversion is underway.

Gold steadied on Monday above the April lows but has not improved on that performance. The additional short covering one might have expected to follow such a rebound has not yet taken place. Another clear upward dynamic is now needed to confirm a return of demand in this area.

The Dollar Index found support in the region of the 200-day MA three weeks ago and is currently testing the 2012 peak below 85. A sustained move below today's lows near 83.5 would be required to check potential for some additional upside.

The S&P500 Banks Index has rallied impressively following its breakout from a more than three-year base. However, today's downside key day reversal suggests a peak of at least near-term significance. Follow through tomorrow would bolster the argument that mean reversion is underway.

More generally, where risk assets look overstretched relative to a trend mean, such as the 200-day MA, the potential for a consolidation of recent powerful gains has increased substantially.