Yesterday morning saw bonds weaken enough to cause some small measure of panic among bond bulls. Said bulls had been nodding their heads all last week as they were finally seeing yields that made sense in the context of long-lasting trade wars, tepid economic data, and little incentive on the part of the administration to make any market-saving gestures while stock prices seemed willing to bounce on the simple hope of Fed rate cuts.
The issue was that the trade deal announced between the US and Mexico was in the same vein as a market-saving gesture (i.e. bad for rates/bonds). Granted, it’s nothing on the order of a US/China deal (largely because there wasn’t any major change to the existing US/Mexico deal) but the forbearance of new tariffs was enough to make bonds rethink the rally they enjoyed due to the initial announcement of those tariffs!
It was refreshing, then, to see yields stop short of revisiting “pre-Mexico” trading levels. A strong 3yr auction yesterday and a perfectly reasonable 10yr Treasury auction today both helped to reinforce that bonds can be comfortable trading in reasonable proximity to the long-term lows achieved last week. This morning’s weak inflation data (CPI) didn’t hurt, although it didn’t help in any profound way either.
If anything, the 2 days of resilience builds the sense that bonds are gearing up for the next big move–one that’s likely to take shape after next week’s Fed announcement. If that doesn’t do the trick the first week of data in July likely will.