“Jobless Claims remained in the 280’s and GDP came in at 3.5 vs a 3.0 forecast. So naturally, bond markets are adding to yesterday’s weakness.”
That sentence would be seem logical and appropriate for most any time in the history of bond markets, but as we continue to navigate the extended post-crisis tumult, a strange new reality is constantly being defined. 2013 was the last time we saw a really firm connection between data and trading levels. The interesting thing was that it was the opposite of the traditional connection. Weaker data actually helped bond markets as it prolonged the hope that QE3 would stick around.
After tapering began–and even more so after it became apparent that it was on an all but predetermined, linear course–bond markets became increasingly divorced from data and increasingly dependent on tradeflows and on related markets for guidance. As we discuss incessantly, one of the most instructive related markets has been Europe, with German Bunds (the European equivalent of our 10yr Treasuries) acting as a drag on domestic rates that might otherwise be trying to claw their way higher.
And so it is this morning that we find ourselves in positive territory for both Treasuries and MBS, despite the stronger data. Yesterday’s FOMC and now this morning’s data have been largely unimportant as near-term trading considerations. But a big rally in German Bunds? Now that’s something! (Note: there are other factors in play at the moment, including supportive month-end bond market tradeflows, but the European influence is the x-factor).