With the taper tantrum in 2013 and Brexit in 2016, two of our most recent examples of summertime bond trading have been pulled very far from historical trends. Namely, the summer months tend to see narrower ranges and flatter trajectories compared to other times of the year. This usually starts in June and coincides with warmer weather as well as kids getting out of school.
This isn’t to say that the next 2.5-3 months are guaranteed to be sideways for bond markets. It’s just a convenient scapegoat when we’ve seen trading like today’s (which marks the 5th straight day locked inside the range set last Wednesday).
Today brought the first major economic report of the week (depending on one’s definition of “major,” but it was more major than we’ve had up until now) in the form of Existing Home Sales. Unlike several recent housing reports, this one came out slightly better than expected, with the annual pace of sales up to 5.62 million vs a median forecast of 5.55 mln. There wasn’t much of a reaction.
The biggest move of the day happened just before and during the opening bell (for bonds… 8:20am). Some would suggest this was in response to comments from a Bank of England member overnight regarding raising rates, but an equally compelling case could be made for the general “tradeflow explanation.” That is, 8:20am is like a bit of a floodgate every morning. Once lowered, we can see a glut of momentum. It usually balances out, but occasionally doesn’t. When the momentum is lopsided in favor of buyers or sellers, it results in a quick, enigmatic spike in rates or prices.
The late morning rally incidentally happened in the wake of preliminary month-end indices being published. These are the indices that dictate how bond traders will need to adjust their portfolios in order to hit certain proportions by the end of the month. We’ve often noticed markets reacting to the first unveiling of these indices–especially when month-end is also quarter-end, as is the case this month. To learn more about how the month-end process can impact rates, here’s the primer.