Bond markets traversed the entire overnight session with no drama. 10yr yields hit domestic hours almost perfectly unchanged and MBS began trading right in line with yesterday's latest levels. The first shoe to drop was German. Specifically, German Bunds began rallying sharply at 9:30am for one of any number of reasons. Some sources suggested it had to do with reports that German Parliament had embarked on a process to tweak the powers and roles of the European Central Bank, while others simply said there were some big Bund options trades hitting a suggestible market.
All of that seems like an overcomplication in hindsight because US bond markets obviously showed up to rally today and had merely been waiting for an excuse. The rest of the day was marked by skittish traders getting rolled up in bond-buying snowballs. In other words, a potential bond buyer has a specific trading level that, when reached, will serve as the signal to buy. After that trade goes through, trading levels continue in the same direction, ultimately serving as the cue for the next trader waiting for the signal.
In the absence of all-out panic, these snowballs level-off after they move through levels where traders are more concentrated. In other words, there are logically more traders setting those signal levels at the more well-traveled areas of the recent range. Once yields move into that range, the snowball described above carries them through the range of trading levels in question and bonds wait for the next cue.
After the initial motivation from German Bunds, the next cue was a sharp drop in oil prices after this morning's inventory data. After that, it was the reshuffling of trading positions after the afternoon's 30yr TIPS bond auction. At some point in that process, the market looked at itself and said "Oh! I see what's going on here. Bonds had a correction over the past 3 days and now it must be time to get back to business." No objection here, but one warning: today could also simply be viewed as "the right thing to do" after such quick losses over the past few days. In other words, today could have been more of an epilogue as opposed to the reinvigoration of the previous trend.
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