Why are Bond Markets Giving Back Yesterday's Gains?
Some days, there is a clear correlation between marketplace events and bond market trading levels. Yesterday, for instance, the strong Treasury auction (which also marked the end of Treasury 'supply' for the week) kicked off a nice afternoon rally. Logical and overt!
Other days, market movers not only are less overt. Even if you can find them, they might not be as satisfying from an investigative standpoint. Yet markets are still moving, so our human nature compels us to try to make our best sense of it.
Enter today's bond market weakness. It doesn't have any satisfying explanations, but there are a few clues. First of all, the nature of the weakness has been fairly well in line with the bearish scenario I laid out this morning as an alternate option to yesterday's positive technical developments. (bottom paragraph, bottom chart HERE).
Beyond that, we are seeing some pressure from Europe, as has been suggested by several media outlets, after yesterday's comments from the Bank of England on rate-hike prospects. This had much more of an effect on 2-7yr maturities than 10yr and MBS, but likely accounts for some of the negative vibe this morning.
Then there's the good, old-fashioned "just because" trading. 8:20am is when the CME pit trading opens for Treasury futures. For all intents and purposes, this is when the bond market opens, even though futures trading has been open electronically all night.
Without an overly complicated explanation, suffice it to say that there are some key market participants that work in person at the CME who don't necessarily trade via 'open outcry' (i.e. yelling and waving arms in the bond pit), but who still ramp up their electronic trading significantly during open-outcry hours. When they "come online" at 8:20am, we sometimes see a glut of trading and movement.
That glut can trigger mini-snowballs of momentum (any market movement for any reason can trigger that sort of follow-through momentum if it's quick enough and big enough). This morning's CME open saw that sort of glut. It wasn't exclusively negative, but activity picked up significantly, and by 8:40am, the bears were in control.
Circling back, finally, to the initial point regarding the 'alternate option,' equities markets began rising with some conviction as the same time. That may not be a motivation for bond markets in and of itself, but we can know with certainty that it isn't a hindrance to bond markets moving weaker.
What we're left with is a bond market that does NOT look to be embarking on a new move to stronger territory, but simply one that is confirming an end to the losing-streak from late May (because yields are still lower than the highs of the past 3 days).