In the week just passed, bonds held a fairly narrow range with 10yr yields capped by a 2.10% ceiling.  On the stronger side, they were generally unable to break below a 2.03% floor except briefly on the morning of the ECB announcement (before Draghi's press conference sent yields ripping back up to the highs of the week.  All of the above amounted to range-finding ahead of a much more important week (this week!).

In the week ahead, with the exception of Monday (today), bonds will digest a slew of the month's most important economic data--the reports that always come out at the beginning of any given month.  Economic data is tremendously important right now as the market decides if the economy is indeed slipping into 'deceleration mode' or perhaps on the cusp of some sort of second wind.  The verdict will in turn be tremendously important in shaping Fed policy.  

Speaking of Fed policy, this week also brings the much anticipated 25bp rate cut from the Fed.  We can call it a rate cut, because it is a foregone conclusion.  The only question is how the market will react to "only" 25bps when a few crazy speculators think it will be 50bp.  My hunch is that those 50bp calls are based on the same sort of strategy that someone might have when trying to shoot the moon in a game of hearts.  They know it probably won't work out, but the payoff would be big if they call it right.  You can bet they have those Fed Funds Futures trades hedged with other trades that offset the exposure.  Even then, Fed Funds Futures are only barely confirming 100% chance of a 25bp cut.

In the following chart, the 100% likelihood of a 25bp cut occurs when the teal line is underneath the lower horizontal line.  After some volatility in recent weeks, notice how it has inched back up to the less aggressive levels (i.e. one cut is more or less perfectly priced in (100% likelihood).

In the bigger picture, bonds have room to continue to consolidated beyond the current week.  It would take a unified stance in the data to challenge this consolidation.  In other words, if the reports are definitely leaning stronger or weaker, yields should break-out higher or lower respectively.