First of all, there are far worse kinds of stagnation in bond markets. The current variety–while appallingly range-bound–is at least stagnant near the best levels in over a year.
That said, what ends this? The same question was the thesis of yesterday’s trading day. The conclusion was that Europe was helping US rates and a bigger move would be needed in Europe in order for US rates to make new lows this year. Incidentally, German Bunds hit new lows later that day but Treasuries and MBS didn’t follow.
So in a way, we got some clarity on the question of “what ends this?” We can at least narrow the answers down to the following:
1. Perhaps nothing. Perhaps bond markets are stuck in the mud here and will be willing to let European markets outperform as much as needed in order to keep 10yr yields from dipping below the 2.4’s. This isn’t very fun or exciting though. Plus it ignores the broader momentum pointing into the 2.3’s. I want to believe.
2. It’s just a matter of time and size. The longer the Eurozone economy deteriorates and/or the larger the move into all-time low rates, the more impossible it will be for Treasuries not to at least break into the 2.3’s and for mortgage rates to perhaps have another shot at “high 3’s.”
The first order of business would be for Treasuries to break out of the potential uptrend seen in the chart below (red lines). Whether or not today’s the day for that may depend on Draghi’s 8:30am Press Conference. The ECB Announcement at 7:45 is very unlikely to break any new ground, but Draghi could always provide some hints about the future in the press conference. The expectations of ECB easing in the coming months is central to our goals.