Today saw a good, old-fashioned pre-Fed "lead off."  Or perhaps that should be a BAD lead off, considering bond markets lost considerable ground.  Whether it's the Fed, or NFP, or one of a handful of other major potential market movers, these so-called "lead offs" happen.  They haven't been as prevalent lately because there hasn't been an event with high enough stakes to cause a pronounced example.

Lead-offs can happen for a variety of reasons.  At their most basic level, lead-offs signify a leaning in a certain direction--one which the big event seems increasingly likely to confirm.  For instance, a lead-off might start on the Wednesday of an NFP week if Wednesday's data shifts the balance of NFP expectations in some major way.  That's probably the most common example, but that's not the way today's went down.

If today's lead-off marked the same sort of shift in expectations, we would have seen a few things that we didn't see.  First of all, we would have needed much stronger economic data in order for it to change anyone's opinion about what the Fed would do.  As it happened, Retail Sales data was tepid, at best, Industrial Production was weaker than expected, despite decent positive revisions to last month's report, and the NY Fed Manufacturing data was downright ugly.  Today definitely wasn't about the data.

Even then, if markets were still trying to lean toward an increasingly likely Fed hike, 2yr yields would have led the weakness across the Treasury curve.  As it happened, 30s were the worst performer, followed by 7s.  So today definitely wasn't about increased rate hike prospects, but those 7yr Treasuries provide a great clue and here's why: 7's are illiquid to begin with.  They're younger.  There are fewer of them.  Volume is always lower.  Heck, they don't even have a Futures contract in Chicago, unlike all of the other Treasury notes and bonds!

The point about 7s is that they were outperformed by both 5s AND 10s.  They were the only Treasury security that stepped out of line (where longer duration bonds were getting hit hardest).  When the least liquid Treasury security is underperforming, it's a good cue for us to consider the liquidity situation, or--in this case--lack thereof. 

Today was about blinking, flinching, freaking out...  Whatever you want to call it, there's a certain amount of anxiety that a certain amount of the market can handle.  There's always some "flinching" going on as we approach extremely important events, but trading positions aren't typically so entrenched and so dependent on the major event for their next cue.  Normally, the rest of the bond market could accommodate a small influx of panicked sellers moving to the sidelines, but today wasn't normal. 

There was a bit more interest in moving to the sidelines than normal, and quite a bit less interest among buyers to scoop up the bonds that sellers were trying to get out of.  That only led to more sellers wanting to get out, only to be met with the same lack of buyers.  Add all that together on a day with limited liquidity and relatively light volume to start with, and the pace of the move quickly becomes intense.  DON'T make the mistake of thinking it has anything to do with the nature of Thursday's outcome.  The only thing today's sell-off says about today is that markets have a lot of anxiety about Thursday.  Making any conclusion beyond that is to see meaning where there is none.