There are plenty of frustrating times in financial markets where a trend is only as good as it’s most recent trading day. This is the old: “the trend is your friend until it’s not your friend any more” routine.
Right now, we know we have European markets providing some positivity for domestic bond markets. We’ve also seen some arguments being made for slow-growth implications hiding inside some of the domestic economic data. Then, of course, there’s the geopolitical thesis where Ukraine tension is keeping US and European yields lower than they otherwise would be.
Until one of these things changes in a major way, it’s hard to assign weight to them. I rarely offer pure opinion, but here’s some: I think you could take away the geopolitical situation and the lackluster internals in the domestic data and there’s no chance in hell that changing those two factors would cause a large-scale reversal in the 2014 bond market rally.
Sorry… Now that I think about it, that’s probably more like fact than opinion. That “other stuff” is good enough for minor course corrections in the bigger picture, but the bigger theme is that Europe is still on the way down, economically. It’s not so much about Europe’s benchmark debt (German ‘Bunds’) and other sovereign debt being at ultra low yields except inasmuch as they bespeak the underlying condition.
The underlying condition is that Europe is in that same place the US was until early 2013 when QE and other easing measures were still waxing (I think that’s what the moon does when it’s still getting bigger/fuller). Once the central bank monetary luminescence began waning, US markets almost instantly priced in total darkness, and there they sat, between 2.6 and 3.0 in terms of 10yr yields until a new moon began waxing.
This time it’s Europe. Taken together, it’s a big economy over there. The yields are not as low as they are because investors want to earn 1% on German Bunds. They’re as low as they are because traders are expecting them to go lower! That’s where we’re heading until we’re not heading there any more. (Note: in the absence of “buy and hold” trading being the motivation, markets are especially susceptible to an absolutely vicious bounce back whenever it comes. Folks are only holding the bag because they know they can resell it at a profit. As soon as that ceases to be the case, no on wants to be left holding the bag!).
You’d THINK that determining a turning point would be a gradual process where data and evidence slowly make a case for things getting gradually better vs gradually worse. But just remember, in the US, it happened in one week from May 3rd to May 10th. That’s all it took for markets to realize the recently full moon just got a sliver smaller (folks were holding bags of Treasuries! And not with the intent of collecting 1.5% interest! You know what happened to the bag-holding aspirations after that!)
Where then, does domestic economic data fit in to the picture? As mentioned above, just course corrections in the bigger picture. Note the current trend below has been intact since June, and we could move to 2.50 or 2.30 today without breaking it. Today’s data may move markets a bit, but it’s not capable of producing 10bp swings without outside help.