By all rights, yesterday was the day that should have seen domestic bond markets consolidate recent gains and take a breather ahead of this week’s NFP data. The session even began that way but European markets had other plans. Both equities and bond yields moved forcefully lower in Europe–so much so that Treasury market participants couldn’t be bothered to swim against the current.
There’s the rub–the lack of conviction. Bond markets showed up for this week’s NFP early–perhaps as early as last week–and have subsequently gone wherever the winds of circumstance and related markets have blown. If stocks and/or Europe have been moving convincingly enough, sure… Treasuries will follow that a bit! If month-end buying needs bring in a bit more participation than expected from portfolio managers, sure… other traders will follow that move as well!
But the “all things being equal” stance for domestic bond markets has been a bit weaker than these unnatural exterior influences might suggest. Technicals don’t disagree. Momentum indicators are running out of steam and there’s even some cause for bigger-picture concern today as a sell-off would set off triggers in several mainstream technical studies in such a way that makes today look like a long term turning point. One example is the ever-popular slow stochastic oscillator. It’s at the bottom of the chart below. When the moving lines are below the horizontal line on the bottom, bond markets are considered ‘overbought.’ I’ve never been much of a fan of that term, but when it occurs in conjunction with other technical events, it can be useful. For instance, in the case of a sell-off today, the two stochastic lines will cross one another in that overbought territory–something they haven’t done since March 2015, which was essentially the bottom of the yield range ever since.
Now, we can see that the day where the actual cross occurred back in March didn’t end up being the absolute bottom, so that’s something of a silver lining. But if the bigger-picture theme plays out again, there’s no guarantee that short term circumstances will provide the same silver lining this time.
Of course this is all just a bearish, fearful way to look at today. There are positive ways to look at it as well. Those mostly involve me jumping on a soap-box and ranting about the irreparable aspects of the domestic and global economies, including things like the domestic wealth gap, the inability of Fed policy to effect change in inflation, the double-edged sword of Fed policy with respect to the already-struggling global economic growth picture, and so on and so on… I’m ready to jump right up there if we manage to rally today. Otherwise, stay frosty.