Yesterday's bond market weakness prompted a conversation about the limits of the current rally.  It went a little something like this (<----that's a link you can click).  For the non-link-clickers out there, here's a recap:

  • Bonds have been in a clearly-defined rally trend since June.
  • Bonds lost ground at a moderately quick pace yesterday after hitting new record levels the previous day
  • The MBS chart was the bigger concern, but the Treasury chart helped to put things in context
  • The conclusion was that weaker days come with the territory and that if the broader trend was under serious threat, we'd need to see significantly more weakness for more than just one day

So far today, the outlook described above (the one about yesterday being a nominal bounce in a bigger-picture rally trend) remains intact.  Frankly, the same thing could be said even if bonds were moderately weaker overnight and this morning.  The fact that we're seeing a bit of strength is even better confirmation. 

Today's chart has the exact same trend lines as yesterday's, but with another 24 hours of trading.  As such we can see that yields approached the upper boundary of their core trend (teal lines) and then bounced back toward dead center to start today's session.

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This sort of movement is consistent with our general sense of the bond trader's playbook these days.  Specifically, there's not much to do besides play the range as we wait for a bigger-picture shift in the economy or the covid narrative.  That range was sideways for a while and it's currently trending lower in yield.  We will watch the current trend for signs of a shift at which point we may well return to a broader sideways range.  

Individual events--if they're significant enough--can upset the trend.  They have to be big though.  It remains to be seen if tomorrow's NFP is up to the task.  Yesterday's reaction to ADP Employment data suggests that's a very tall order.  The wild card would be a significantly stronger number, because market chatter suggests the forecast is far too high.  In other words, traders would be surprised to see a strong NFP tomorrow and part of the current strength in bonds could be based on the expectation for a weak NFP.