Bond market participation is such a big and complex thing that the true nature of cause and effect can only be guessed at. Some guesses are more educated than others. Some make good logical sense, while others that may seem implausible simply can't be disproved and therefore earn a place in blogs, email lists, and among talking heads. I'll give you both right now.
On a sober, logical note, we've already discussed the interplay between European bond markets and our own. Indeed, several events in April and May that concerned European markets, ended up having a pronounced effect on US Trading levels. Spikes in volume and volatility surrounding those events make a good logical case for the general notion of "potential Eurozone QE" being a major market-moving consideration over the past few months.
But if one was so inclined, a case could also be made that 2014 positional considerations + the Q1 GDP surprise is the star of the show. What do I mean by 'positional consideration?' Simply that the overwhelming consensus was for higher rates in 2014 (and it still is). Come to find out that there are too many market participants betting on higher rates for every trade to have sufficient counterparties. If everyone bets on the same horse, no one makes any money.
The collective unconscious of bond markets 'realized' it couldn't push rates higher as fast as it expected, so some 'cleansing' was in order. Positional imbalances had to be washed out before organic trends could resume. Enter the pain trade. In not so many words, this simply means markets did what they needed to do to restore balance. In a lopsided market the pain trade is called the pain trade, because it delivers just that to almost everyone (it's also called that because traders are literally forced to make trades that cost them money in order to preclude the risk of further loss).
Nothing in Europe and no domestic economic data is needed for a bond market pain trade. Regardless of the economic or even the technical landscape, if positions are imbalanced, the forces of market nature will restore them.
It's at THAT point that the magic happens...
That's when those notions that sound kinda weird, but can't really be disproved need to quickly find scapegoats, because the pain-trade explanation absolutely fails tosatisfy human beings' philosophical quest to understand their surroundings and the natural order of events.
As discussed above, the Eurozone QE posturing is actually an organic contributor to spring-time bond market strength. As such, it's not so much a scapegoat as it is a simple complementary development. Q1 GDP is a MUCH better scapegoat.
While some pundits guess that the 'weather effect' was simply worse than expected, the simple contraction in inventories is more than enough to explain the even bigger miss versus forecasts (both on the advance and preliminary versions of GDP). As far as accounting for GDP weakness, reasons don't matter. The fact was that we had a "household name" economic report come in much weaker than forecast.
No matter how much sense that fact made (weather + inventories + an almost certain big bounce back in Q2), markets now had their scapegoat! Here we were looking for justifications to wash out the overbuilt contingent of folks betting on higher rates, and here comes this headline that newscasters of all shapes and sizes can cover. Cue the bond market rally, right?!
While this case for causality is more about proving the point (that sometimes points can't be proven), it's interesting to note that bond markets were not only technically sideways before the first reading of Q1 GDP, but they haven't closed in weaker territory any time since then. Almost like GDP pounded a stake in the ground marking the top end of the range. Coincidence? Probably, but you never know... If it's not, today's GDP reading is all the more interesting.