The most notable feature of the current trading week continues to be its lack of notable features.  There isn't much data on tap (ISM Non-Manufacturing today, but that's about it).  There aren't any major economic/monetary events that have markets speculating (those come next week).  We haven't seen any big market-moving headlines, nor do we expect them.  With the Fed coming up next Wednesday and the ECB a day later, that's when we would be more likely to see bigger things happening for bigger reasons.

Nonetheless, we can still tune in to 2 of the voices in my head to set the stage for what may happen between now and then.

Voice 1 is basically a slightly bearish realist who feels that all of the recent gains were propped up by European bonds (thanks to the likes of Italian drama).  This voice tells us that with the Italian drama on the outs, we need to be cautious about a return up and over the 2.915% gap, and that a token bounce this morning shouldn't be taken as a sign of lasting resilience.  He might point out how stochastics look very different this time around when compared to the last time yields looked to be bouncing around 2.915 (i.e. they look much more bearish now whereas they had all kinds of bounce potential last time).

Voice 2 thinks voice 1 is a big, grumpy whiner who worries way to much about what could be bad for bonds instead of focusing on what might be good.  He's definitely a bit more of an idealist, but not blindly so.  Part of his rationale is that voice 1 has way more friends who agree with the bearish stance.  In other words, most market participants are on board with the mindset that big-picture headwinds mean rates should continue to move gradually higher.  Voice 2 knows that an imbalance of sentiment on one side of a debate can make for the best opportunities on the other side.

Voice 2 also might point out that, while the Italian drama is waning, it nonetheless served as a wake up call regarding the fragility of 3%+ 10yr Treasury yields.  After all, bonds didn't need some big policy change out of the Fed or major shift in economic data to find sufficient buying demand for sub-2.8% yields.  Moreover, if bonds are always trying to price in their best guess about the future, and if more and more discourse is emerging on "the next recession," perhaps it's not so silly to hope for a bounce after all.  Voice 2 would be quick to point out that there's even some chart-based support for such a notion.

If I were moderating this debate ("I" being my least-biased self--"voice zero" if you like), I might point out that any pause or acceleration around this 2.915% gap is really just a sideshow in the bigger picture.  Returning here does more to tell us that the wilder portion of the Italy reaction is over and that we can return to our regularly scheduled programming.

If yields move lower, we can conclude they were likely to move lower from 3.12% anyway, with or without the help of Italy.  If they move higher, we can expect to see a lot of debate and anxiety about whether they can/should break to new long-term highs this summer or simply use recent highs as an upper boundary for consolidation before making a bigger move heading into the Fall months.