Last Monday saw an unpleasant reversal of 2 days of gains heading into the previous weekend. Now this Monday is going through some of the same motions. But as we discussed on Friday and earlier this morning, things are different this time around, and none of this morning’s weakness refutes that so far. Here are a few things to keep in mind when considering that today is “less bad” than last Monday.
Right off the bat, it should be noted that volume is exceptionally light in the recent context. Combined with the absence of meaningful economic data and the ongoing phenomenon of light liquidity, this greases the skids for trading to have a far bigger impact on market movement than it normally would.
From there, let’s consider how US and European bonds have been moving together. Last Monday’s weakness was driven by a sharp, scary sell-off in Europe. In today’s case, however, German 10yr Bunds are mostly flat. Additionally, we can clearly see US 10’s take off like a stuck pig at 8:20am. That’s always a clue that tradeflow momentum is in control (because 8:20am is the CME open for Treasuries).
Tangentially related to the CME open, corporate debt issuance is also starting the week with a bang (related because some of the corporate debt hedging activities that are hurting Treasuries/MBS must wait for the CME open, depending on the traders and securities involved).
Bottom line: yes, it’s another weak Monday, but it’s not the same sort of weak Monday this time around. In fact, today’s trading range has been completely contained by Friday’s. By this time last Monday, the trading range had already crushed the previous session’s yield highs several times over. At current levels, the worst thing that might be happening is that we’re consolidating ahead of Wednesday’s FOMC.