Bonds have had their good eye on stocks for months now. Almost any instance of exceptional bond market strength has come courtesy of exceptional weakness in the stock market. Today was–well… and exception.
Stocks and bonds both began the day fairly close to yesterday’s latest levels. Stocks stayed there. Bonds didn’t. It’s really that simple in terms of recapping the movement itself, but what was the underlying cause?
Given the timing of today’s volume spikes in bonds, we’re almost certainly dealing with year-end tradeflows. What does that mean? In a nutshell, these are trades that were going to be made today (or some time before the end of the year) regardless of any other inputs. Certain traders had positions they needed/wanted to close before 2019 arrives and other traders were compelled to adjust their bond portfolios based on month-end index extensions.
If these motivations create an imbalance of buying demand against an illiquid backdrop, it can easily result in a fairly brisk move. Sadly, that move carries no implications for the first few days of 2019, which begin on Wednesday of next week as far as markets are concerned (bonds are closed on Tuesday for New Years Day).