Bonds Battle Back After Fed Foregoes Surprises

Today’s focus was understandably on the Fed Announcement, and indeed, most of the movement followed it.  But interestingly enough, the biggest volume spikes occurred at other times, and that helps explain the day’s paradoxical movement.

So what’s the paradox?
Quite simply, it made very little sense to see as much of a rally as we saw based on the content of the Fed Announcement.

Because the announcement was utterly inoffensive.  If you’d commissioned a thousand market participants and Fed followers to draft a consensus estimate for the Fed, it would have looked exactly like today’s actual announcement.  In short, there was nothing even remotely resembling a surprise.

Where’d the rally come from then?  

Bear with me here.  The rally came from yesterday’s sell-off.  As we discussed, yesterday was an odd day with unsatisfying explanations for the weakness, mostly having to do with esoteric nonsense like tradeflow momentum, position imbalances, position squaring ahead of auctions and the Fed, and a bit of algorithmic trading in response to technical levels.

How much could all that nonsense have really mattered compared to an actual market mover like the Fed?

Let’s put it this way: yesterday’s volume was higher than today’s, and there were no big ticket events on the econ calendar.  Moreover, today’s biggest volume spike came at 3pm ET (the CME close, and a time of day where tradeflows can swell simply because it’s many traders’ last opportunity of the day to adjust positions.  The other big spike (bigger single-minute volume than the minute following the Fed announcement) came at 9:17am and was directly attributable to two big block trades reported through the CME site.  That’s a bunch of fancy talk for traders taking cues from what other traders are doing and/or “tradeflow momentum.”

The 5yr auction at 1pm played a supporting role in the positivity, coming in much stronger than expected.  The caveat is that yesterday’s bond market weakness certainly made it easier for traders to bid at the auction, and we can assume the results would have been average-to-weaker were it not for yesterday’s sell-off.