Bonds sold off aggressively today, for a combination of reasons that are tremendously unsatisfying in a traditional market-watching sense. For example, it would be nice if we could point to something tidy and logical like all-time high stock prices, or the stronger Consumer Confidence data, but at the very best, these were merely supporting actors in a subtler, more complex drama.
Actually, it’s only complex inasmuch as it’s not the first thing most market-watchers think of when they see moves this big. It’s actually fairly simple as long as you can accept that something so simple could actually cause so much movement.
Long story short: a small imbalance of positivity had built up over the past 2 weeks. It wasn’t too troubling in and of itself, and it could have turned into even more positivity if certain political headlines had been more scandalous to start the week. Not only has there been a relative absence of panic-inducing political headlines, but several other factors conspired in small way to tip over the dominoes that had been precariously arranged by the aforementioned imbalance.
In other words, bonds got sucker punched. Wrong place, wrong time.
This is best explained in some ‘in-a-nutshell’ bullet points:
- European yields led bond markets weaker overnight, partly fueled by stronger data
- That triggered technical “stop-loss” levels in US bond markets, forcing a recent abundance of long-positions to cover (by selling) and also creating algorithmic selling demand.
- Stocks are moving to all-time highs. Could stock strength contribute to bond weakness on some levels? Sure, but they’re not the driver here. Not today.
- Treasury auctions and a Fed Announcement in the coming days aren’t helping bonds want to be any more aggressive. The cue was clearly given (over the course of today) to flush out the “long positions” and longs won’t come back in force until the coast is clear.
- The coast will look clear either due to a compelling event (the Fed says something dovish or a scandalous political headline hits) that forces yields lower, or simply because 10yr yields continue higher and then bounce before breaking above 2.40% (this would make the current move look like a deliberate correction, and the bounce under 2.40% would make it look like the correction had run its course).