GDP was super weak (0.2 vs 1.0 forecast) and all of the important internal components were weaker as well.  So naturally, bond markets rallied on the news.  One major problem with that rally though: it occurred inside a much larger, much more forceful sell-off.  In hindsight, it's barely detectable.  "Something" pushed bond markets forcefully into weaker territory this morning and it wasn't about to be stopped by a silly little thing like really weak GDP data.

The question is what is that "something?"

Whatever it is, we know it speaks German. 

European debt exploded this morning.  It has been a complete snowball sell-a-thon for German Bunds in particular, though British 'Gilts' are also under noticeable pressure.  US Treasuries did a fine enough job of not following suit overnight, but that's only meant that they've lost ground at a slightly gentler pace.  Believe me when I say that it's a small miracle that Fannie 3.0s are only down 9 ticks at the moment.  German Bunds are down about 40 ticks on the day.  US 10yr Treasuries are down 19 ticks (in price).  There has been some suggestion that Germany's weakness was due to Greece presenting a reform bill, but based on movements in Greek bonds, this thesis doesn't hold water.

The fact is that there is no single, tidy cause and effect.  There are several probably factors for the weakness, but none of them make great news.  The technical bounce in German Bunds was in the works as early as April 21st when I wrote: "The risk is that the economic data doesn't have its intended effect due to the technical situation in German Bunds (their 10yr sovereign debt, and the European Benchmark). It's not that European bond yields probably won't continue making new lows, but in so doing, they'll likely undergo a periodic correction or two. Such corrections are often foreshadowed by the sort of technical 'grind-to-a-halt' seen in Bunds over the past 3 sessions. If the bounce transfers to Treasuries, it could be enough to give us our pre-FOMC trend (and not the fun kind). " 

And here we are, with an un-fun pre-FOMC trend.  But it's not merely a European phenomenon.  The Fed is always affects domestically-motivated trade as well.  In the current case, I think a Reuters headline sums it up the best: "Fed meeting seen as chance to nudge markets on rate hike timing."  There you have it.  There's no major surprise expected, but market participants at home and abroad are clearly worried about (and will clearly be looking for) the nudge.