Bond markets had a great day on Wednesday and were able to rally both before and after the 10yr Note Auction. The question is: does this reveal some latent, overflowing demand for bonds or is it 'something else?'
Sadly, probably the latter. Bond markets have worked through an increased level of volatility in early March compared to most of February. The NFP data called a heads-up vote on whether or not we could begin to move away from the weather as a key consideration in economic data. Before that, Ukraine headlines ebbed and flowed (and might be ebbing again now... or is that flowing?). Corporate issuance has been massive, and trading positions have been caught offsides on several recent occasions.
The past few days are starting to look like just such an occasion, where traders are likely to have made bets that rates would go higher after NFP, only to find other tradeflow considerations pushing rates just low enough to get them to cover those bets. When one of them covers, the next one becomes more likely to do so until the short-covering adds meaningful oomph of its own accord. This goes a long way in accounting for "surprisingly high demand" in a Treasury auction without a surprisingly high indirect bidder contingent (which might suggest high foreign demand).
For instance, in the chart below, yields had been operating well above the midpoint coming into the week. If it began to look like they were heading back to the midpoint, as opposed to breaking higher, why waste time in getting back there?
While that doesn't bode well for long term prospects, it doesn't mean the short term rally has to be over just yet. After all, if more short bets have to cover, that's just more positivity waiting in the wings. It's likely that not all of them have been 'stopped-out' yet. So if today's economic data is weak enough to motivate a few ticks of improvement versus yesterday, more snowball buying is possible, especially surrounding the 30yr Auction at 1pm. If the data is strong, however, the party could be abruptly over.
Retail Sales has the most street cred of today's reports, but Jobless Claims is actually in more interesting territory due to it's frequent bouncing on the 323k level (highlighted in the chart below. Retail Sales thrown in just for kicks).
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