Both stock prices and bond yields moved sharply lower today for a combination of reasons. Trade tensions are ongoing, with visible effects being increasingly noted. British politics are also weighing on markets with Theresa May likely leaving office within the week. Most obviously today, the Markit manufacturing and non-manufacturing PMIs suggested economic contraction (or major deceleration, depending on the internal component in question). This coincided with heavy losses as the start of the NYSE session in stock to create a flood of safe-haven demand in the bond market.
Bonds had their own structural motivation as well. This refers to the “structure” of the bond market in terms of the balance of trading positions with various stop-loss levels and duration preferences. In general, bond traders were far more likely to be in short positions heading into the week based on the fact that most technical indicators made a clear case for a bounce toward higher rates that began on Thursday last week.
When short positions are stacked up like that, they’re vulnerable to being forced into a short squeeze. This snowball of short-covering wasn’t the key reason for the size of today’s bond market gains, but it definitely helped make the move bigger than it otherwise would have been.
On a final note, we have to consider the fact that liquidity is relatively lower heading into a 3.5 day weekend. As I warned at the end of last week, the end of the current week could increasingly see idiosyncratic trading. At least part of the volatility could be chalked up to that as well. Due to the timing of the econ data cycle, we won’t have a great idea about how the full roster of traders will react to the current environment until the first week of June.