After the sorts of big movements seen yesterday, it’s not uncommon to get an equally big movement back in the other direction. That may well have been the case had it not been for the uncommonly sharp same-day reversal yesterday afternoon. This arguably washed out what might have otherwise been a natural tendency to bounce back.
This also allowed bond markets to begin the overnight session on more neutral to positive footing. Why positive? When these big market shocks occur, it’s like anything in the physical world being pulled much farther away from their central tendency than normal. In the past, I’ve used the “guitar string” analogy. The farther away from the center you pull it, the more forcefully it snaps back, and the longer it vibrates before returning mostly back to it’s normal range.
Applied to bond markets, the “normal range” of the guitar string’s travel would equate to the natural path of bond markets in the long term. That path isn’t important when we’re analyzing the near term disruption. What’s important is realizing that the uncommonly big force applied to the string is going to have some near term repercussions in terms of volatility. Because the proverbial string was able to get back to the other side of it’s wide range yesterday, it was free to bounce back to the opposite side overnight, and then to bounce back again this afternoon. The white line in the chart below shows the general path and reversals of 10yr yields relative to the recent trend.
Long story short, most of the movement today is attributable to the aftershock from yesterday’s move. Bond markets didn’t weaken enough to make any significant statement about heading higher in yield. In fact, if anything, holding under the 2.17% area into the close is a technical victory as this was a big pivot point on the way down.
All that having been said, it’s not guarantee that resilience will continue. The better way to think about it is that the door remains open for resilience to continue. In other words, we can’t be sure if we’ll win, but we know we haven’t lost yet.