In glancing at various trader/analyst/strategist emails, I see perhaps a greater diversity of opinions about today than of any other recent trading day. Some thought it was strong–a confirmation of yesterday’s move below Monday and Tuesday’s low yields. Others thought it was weak, with the post-auction move signalling the beginning of the end of 2017’s nice little rally. A few took a middle path, and that’s how I see it.
First, let’s talk about what happened. Bonds began the day in stronger territory–right in line with yesterday’s best levels. They continued to improve steadily from there, with the first few hours of NYSE trading helping the cause.
Stock losses reversed course at 11am and then made a bigger move higher after noon. The fact that bonds didn’t follow was a major clue. It suggests that traders were positioning for another stellar auction after yesterday’s truly inspiring 10yr auction. After all, it would make much sense to sell Treasuries at noon if the 1pm bond auction might make that look like a terrible idea.
As it happened, the bond auction ended up being rather average–not nearly strong enough to justify the big lead-off taken by bond markets. Selling pressure mounted quickly and within a matter of 2 hours, we were right back near unchanged levels.
If you want to read any more significance into than that, we could consider that 10yr yields have now tried (and failed) to break 2.34% for 2 sessions in a row. Keep in mind that while yields traded lower intraday, we’re looking for CLOSING levels to hold under 2.34% for 2 consecutive days before we have “confirmation” of a break.
If we want to get even more bearish, we can consider that Fed speakers started talking about ending reinvestments of bond purchases today(a MAJOR source of sponsorship for mortgage rates). That sounds fairly scary, but it’s not a new concept, nor did any of today’s big moves happen in the vicinity of the headlines. In fact, bonds rallied after the scariest newswire (in which Fed’ Harker said the Fed should think about ceasing reinvestments when the Fed Funds Rate gets to 100bps).
The bottom line is that yesterday’s auction caused a very VERY small bubble in bond market optimism–a speculative surge, if you will, regarding how much bond-buying sentiment might truly be lurking as the new year progresses. Today’s 30yr auction showed that no bubbles were justified, and here we are at relatively unchanged levels. Sure, there are a million other things we could add to that narrative, but no matter what, we’re waiting for a technical breakout of 2.42 (2.40 if you want to be conservative) or 2.34% in 10yr yields.