Whether or not we agree that the “Great Rotation” will continue to, well… rotate, its inherent themes have been playing out in markets daily. Today was a great example as the morning’s gains (which looked like a push back against yesterday’s weakness in a “continuation” sort of way) turn out to merely be short-covering that paves the way for more neutral perches to add the next position. In other words, we know that plenty of bond traders had open bets on higher rates last week (more on that from the widely followed JPM Survey showing less neutral, more longs, and most shorts since July 2011). The break below 1.97 overnight and this morning in 10yr yields was a line in the sand for short positions put on last week, and the weaker Consumer Confidence numbers obviously added to those short-covering urges.
That set up a bad afternoon for bond markets, which, having recently been purged of any latent, artificially supportive short covering sprees, were now free to make new bets again. Stocks gave cues as they managed to shrug off the weak data. With FOMC coming up the next day and a pervasive bearishness to fear in general, time for more shorts! Things are probably more balanced around these 2% levels in 10yr yields and there are plenty of reports of longer-term, strategic account types coming in for opportunistic buying at the 6+ month high yields. Wednesday through Friday’s flurry of significant data will either make that look like a good decision or a bad one. We’re planning on getting our best sense of that after tomorrow’s FOMC Announcement, though brisk movement is possible in the morning with ADP and GDP.
Oh yeah, and MBS followed the Treasury rally and subsequent sell-off. Tons of lenders repriced worse, bringing most rate sheets back in line with yesterday’s.