For several weeks heading into the December Fed announcement, we discussed the impressive Nov/Dec bond market rally and the fact that the Fed would likely have the last say about market momentum until the jobs report at the beginning of January. Whether it was due to the jobs report being much stronger than expected, or simply the fact that bonds had become so overbought, the risk of a correction has quickly materialized since last Friday.
To be fair, last Friday itself didn’t look overly threatening. In the recent context, it merely brought rates back to levels from 2 days prior. Before that, those rates were still the lowest in many months. The first two days of the current week have been a bit more sinister as they’ve added up to more meaningful erosion of the recent rally.
There’s still every possibility that this weakness is a logical and necessary part of a consolidation–one that won’t ultimately constitute a full-blown correction. But bonds will need to avoid adding too much more weakness to the trend that’s been developing for the past 3 trading sessions.
Today looked like it had some hope for a while. Bonds were dragged into slightly weaker territory early, but made it back to unchanged before noon with help from stock market selling. After European markets closed, stocks bounced and brought bond yields along for the ride. MBS outperformed Treasuries, but nonetheless ended the day near the weakest levels in more than a week.