We’re all a bit shaken up–us market watching types. Almost all of 2014 through January of 2015 was great, and now February has stuck out like a sore thumb. This week’s refreshing rally on Tuesday was the first real glimmer of hope. As of Thursday night, that glimmer was far from extinguished, with 10yr yields holding under the important 2.04 technical level after having been as high as 2.16 in the previous week.
All of that is good, but any strong bouts of selling are unsettling right now. We want our glimmer to grow and flourish–not to have merely been a cruel harbinger of false hope.
I’m here to tell you that even if today ends up being rotten for domestic bond markets, it has almost no chance of rendering a final verdict on long-term bond market strength. I only use the word “almost” out of respectful habit to capricious markets. There’s really no chance. The worst thing today could end up being in retrospect is the day that preceded more negative days, but the point is that in and of itself, nothing is being decided.
Not only that, but there’s reason to believe that we can get some of our glimmer back if data cooperates (we can get some back even if it doesn’t cooperate, but that might take more time). One reason for this is the significant amount of weakness owing itself to corporate bond issuance yesterday (which connotes selling of Treasuries in order to lock the rate on the corporate issuance). So that made for an unexpectedly large and determined amount of selling in the afternoon. Additionally, there’s some talk of month-end buyers having taken advantage of the post-Yellen rally to pick up their needed bonds as opposed to waiting for a more traditional time frame on the last 2 days of the month.
Finally, there’s the reason rates are as low as they are in the first place: Europe. Something encouraging happened yesterday (depending on your definition of encouraging… after all, it could bring about the end of the financial world eventually, but in the meantime, it’s good for rates). German Bund yields hit new all time lows for the first time since February 2nd. That’s the kind of thing Treasuries need to see if they’re going to continue to allow themselves to be dragged kicking and screaming back into the 1’s. No amount of GDP bullishness will counteract a global race to the bottom in sovereign debt yields, and with yesterday’s break lower in Bunds, that game is still on.
Naturally, if GDP is much weaker than expected, that should only help. Keep in mind though, that the tradeflow considerations can change greatly from month to month. So whatever we see today could have an entirely different tone than whatever is waiting for us on Monday.