It was a bit of a cruel session for bond markets as the day started out in stronger territory only to sell off with less than 2 hours to go. After 8 days of general negativity/volatility, this morning’s gains were due to arrive any time now. The fact that they lasted all of 6 hours is yet another feather in the cap of the September slide.
Most market participants have their eyes on next week’s Fed announcement due to the risk that the rate hike verbiage is changed. This is also the explanation that most media outlets have latched onto. Less mainstream, but perhaps equally important is the shift in European Central Bank sentiment that took place last Thursday. Long story short, the ECB delivered a batch of accommodation that seemed only half complete and now seems to content to let that sit. This is significant because until then, Draghi had been clear in saying “we have more coming!” Now he’s back to “prepared to do more,” etc. Markets feel duped.
Next Wednesday will tell us a lot more about how these two central bank factors stack up in terms of market motivation. If the ECB is really the bigger deal, we won’t see the reaction to the FOMC that markets are expecting. All this having been said, today’s weakness ends up moving 10yr yields only about a bp higher, which technically leaves them still inside the 2014 trend toward lower rates. While that’s no guarantee we’ll stay there, it’s a reminder that we haven’t been forcibly removed yet.