The big takeaway from yesterday's Fed reaction was that the rally was finite--not motivated by a new development, but rather by a correction to an overdone trade ahead of the Fed. In other words, there was a magic line in the sand (the equilibrium point where traders made it back in line with Fed rate hike expectations) that would mark the end of the correction.
Today's trading raised the possibility that we've already reached that magic line. Things began innocently enough with Treasuries holding fairly flat during Asian market hours. European bond markets opened in stronger territory but weren't interested in staying their. German Bunds rose roughly 7bps by 7am, pulling US 10yr yields up 4bps in the process.
The volatility during the European hours was really the highlight of the day. US bond markets went on to hold a narrow range marked by the technical levels in play during yesterday's Yellen press conference. I'd hoped to see bonds improve in the afternoon based on the logic that Europe was making a negative contribution that would no longer be present after European markets closed. Instead, US bond markets continued holding the range and even weakening slightly within it.
At the very least, we can conclude that finite, corrective post-Fed move has run its course and bond markets are back to faring for themselves. Green vs red probabilities are now more evenly split, but green days would need to quickly get us back below 2.50% in 10yr yields. Otherwise, we're increasingly at risk of a "technical confirmation" of a breakout (although the technical implications would be even more dire at 2.64%)
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