Analysis: Bond market pressure is squeezing Main Street as Wall Street waits on Warsh

There's something telling in how the smart money on Wall Street has started to think about socialism. The moral of the story isn't really about socialism, though, but about the very real pain in store for American households from the bond market if the actually-in-charge capitalists don't get their act together.

The idea is that socialists are on the rise, but the problem will be self-correcting because the national debt is so crushing it will force whoever's on top to deal with it.

"A democratic socialist, motivated by hatred of inequality, may be just determined enough to stake his or her political career on the idea that America can finally stomach some tax hikes," write Matt Gertken and Yushu Ma, analysts at research firm BCA, in a recent client note.

But the bond market is already becoming a check on Americans' livelihoods, with the capitalists firmly in charge. A sell-off in recent days has been triggered by an unlucky confluence of events and egged on, perhaps inadvertently, by the new Federal Reserve chairman, Kevin Warsh . That points to the conclusion that the pain for Main Street is likely to remain intense for the foreseeable future, even as Wall Street continues to prosper.

Bond traders have spent the summer selling off long-term U.S. government debt, resulting in a sharp steepening of the yield curve. The short end of the curve tends to follow the Federal Reserve's policy rate , while the long end reflects bets on growth and inflation. And while the Fed hasn't budged under Warsh, the market's view about the long end has gotten a lot more muddled lately.

The spread between 2-year and 10-year Treasuries has grown by nearly 29 basis points since June 24, according to FactSet data, a large gain in a short period. (One basis point equals 0.01%.) That was driven primarily by an increase in the 10-year, which traded above 4.7% on Tuesday.

Yields near 5% tend to provoke angst on Wall Street, because they allow investors to earn an alternative robust, risk-free return. Still, a sell-off would have to be deep to reset the economy's winners and losers. The S&P 500 has returned a cumulative 77% over the past three years, according to FactSet data. Stock holdings are concentrated among the wealthiest Americans.

Meanwhile, Treasury yields are dragging on Main Street. A swath of consumer debt is heavily influenced by the 10-year yield, including mortgages. A 30-year mortgage will now cost a typical purchaser 6.75%.