Over the past few days, we've seen bigger-than-normal intraday swings in bond markets. The day began with one trend in force only to end with trading levels heading briskly in the other direction. What's up with all that?
First of all, there is never only one factor driving bond markets, even though there can be a clear leader in terms of market movers. Moreover, most of the market-movers will be in play all the time for bond markets, regardless of external goings-on. This isn't just a bond market phenomenon by the way. Take away all the external cues--headlines, economic data, monetary policy--and traders will continue to work whatever's left of their strategies and portfolio needs.
Sometimes even when there are plenty of external cues, bond markets are simply using the discrete data to inform and refine a broader conclusion. In other words, bonds are looking to build a narrative about what's generally going on in the financial world. Every little headline and economic release can inform that narrative.
The current narrative seems to be about whether or not the global economy is screwed. Will stocks keep heading lower in 2000/2007 style? Are central banks well on their way to waging full-blown currency wars? Did the world suddenly realize that it's not going to need as much oil as it's making? What's the economic and political fallout of the oil situation? Why am I seeing so many shanty towns when unemployment is around 5%?
These are the questions that keep bond markets up at night. If the world is going to get screwed, bonds want to be there. With 2016 being the most aggressive bout of stock selling since the financial crisis, it's no surprise that bonds have pulled up a front row seat.
At the risk of stating the obvious, any time that bonds--or indeed any security that trades in a historical horizontal range--approach a lifetime range boundary, the day-to-day movements tend to get more volatile. After all, it takes a certain powder keg of financial drama to get bonds into the current range in the first place. Movement toward or away from extremes is not the sort of thing that tends to occur in measured steps.
In short, bonds are moving more because they don't know (yet) if the next move is a run down to new all-time low yields or a vicious bounce back from whence we came. A case can be made for either, and until the path is clearly chosen, yields are holding mostly sideways inside the boundaries seen in the top section of the following chart. The lower section shows the only other times that yields have moved into this range.
Today brings Durable Goods data in the 830am time slot along with Jobless Claims. The latter is no longer a market mover, but the former can certainly have an impact. That said, I think bonds will be most interested in any big stock/oil price movements, regardless of the data.
The afternoon brings the last of the week's Treasury auctions with 7yr notes at 1pm. Auctions haven't been major market movers, but the week's final auction can occasionally serve as a pivot point for trading momentum. That's a fancy way of saying keep your eyes peeled for any shift in the tone just after 1pm. The closer yields remain to the 1.74 mid-point (not pictured, but implied in the chart above), the less there will be to conclude.
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