Domestic bond markets had been getting pummeled for exactly 3 weeks before getting a break on Tuesday. Then yesterday, they confirmed they’re not going to go down without a fight. The question now becomes ‘how hard will they fight back?‘
In order to answer this, we first have to understand what they’re fighting against. As I laid out yesterday, while Yellen and NFP have mattered greatly in the short term, the biggest factor in the bigger picture has been Europe. Specifically, US bond markets would be justifiably concerned about the possibility that Europe is putting in some sort of long-term bounce after German Bunds hit 0.30 at the end of January and after Greek debt hit its weakest levels since mid 2013 (when it was still on it’s way back from the brink of Eurozone exit).
By the end of this week, we’ll likely not be hearing much from Greece until late March at the earliest. I think part of the February weakness has been the realization that Greece was staying in the Eurozone and that Treasuries, etc. wouldn’t have that additional benefit from flight-to-safety buying motivated by fears of systemic Eurozone weakness. That weakness appears to have run its course for now, leaving the general growth picture as a more important market mover.
With that in mind, economic data can start to regain importance that was placed on hold in favor of headline-watching. In addition to data, tradeflows and technical levels are almost guaranteed to play a major part as markets look around trying to find the next lemming with a convincing swagger. After the past two days, the technical outlook is much-improved. It’s in that exciting but still tense place where opportunity exists for further gains, but where the recent gains hit their first major road-block at the 21-day moving average. Bottom line on the technicals though: if 10yr yields are holding under 2.04, things are stabilizing or improving. Breaking over 2.04 would suggest a defensive strategy.
Today is the most robust day of the week in terms of scheduled economic data. In the 8:30am time slot alone, there are three solid middle shelf reports. Of the three, Jobless Claims is the only one that hasn’t shown much capacity to move markets in recent months. Durable Goods is the biggie, and CPI is somewhere in between, but with a certain old-timey wild card potential that the others lack (i.e. a big move in core CPI is capable of producing a strong reaction). After the data, the week’s last Treasury auction hits at 1pm.
Beyond all the domestic concerns, we have to remember that US 10yr yields can’t justify an existence below 2 percent without European bond market strength and concomitant global growth concerns. No matter what’s going on with domestic data, if anything conspires to push core European yields noticeably higher, US rates reserve the right to freak out.