US bond yields are rising again as the market girds for the 7-year note auction at 17:00 GMT. By the time that auction is completed, the Treasury will have sold $101 bln in notes just this week.

I’ve been asked by a reader to explain the impact on the market of rising bond yields. Short answer: It depends.

When yields are rising for the “right reasons” like robust economic growth which could potentially lead to inflation, those conditions tend to support currencies. When bond yields are rising because the market is losing faith in the government’s ability to pay its debts or the central bank’s inflation-fighting credentials, that is generally a bad thing for a currency. That is the situiation the greenback has had to contend with in recent weeks.

At some point, however, interest rates differentials become attractive to investors. We’ve seen a wave of investment from Japan this week, for instance, which has supported the dollar. We’ve seen central banks buying dollars against their local currencies which could help cool the jump in yields. The cross currents often conflict and are hard to sort out, making this much more of an art than a science.

What the market is trying to sort out now is will rising US rates derail the nascent US economic recovery and send the economy spiraling further? If so, risk aversion should rise. Under that scenario, deleveraging will resume, the dollar will rise, bond yields will fall and stocks will decline. I think.