2014 has been an interesting year for bond markets. In fact, in terms of its ability to continually confound market expectations, it's been one of the most interesting years of the recovery. This is not because there's been any large and unexpected movement. Rather, it's because there's been an absolute LACK of big, unexpected movements!
Although markets have come to terms with the fact that rates can be lower this year, that's not the end of the frustration. Bonds have found a new way to confound by detaching from economic data. Now, on any given day, tradeflows, geopolitical risk or overseas considerations (EU QE for instance) could trump the suggestions made by economic reports.
It's good to stay a bit skeptical of any notion that geopolitical risk has absolute power over rates, but it does have an impact. This is especially true on days where the event calendar is relatively slow as the default expectation is for global markets to move in loose unison toward and away from "risk." The simplest expression of this is the stock lever where rising stock prices and bond yields align with increased risk tolerance and vice versa. The relationship isn't always 1:1, but it's still easy to see.
To a certain extent, we can continue to expect markets to huddle together around the notion of risk for a while longer. That's just a fancy way of saying the 'stock lever' should stay at least somewhat connected this week. Two days present a bit of a wildcard for that outlook though. Today is one of them.
The wildcard has everything to do with the presence of economic data. Today brings CPI and Existing Home Sales. Markets are recently more interested in inflation and housing. It's not that these things weren't interesting before, but there's been more focus on both among the Fed and others. That means that any major deviation from expectations in today's data actually has a chance to cause some movement. Whether or not that movement is enough to break the monotonous range remains to be seen.
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