Last week ended with snowball selling in the bond market.  Given the approach of a holiday weekend, there was a chance that the weakness was overdone and that we'd see a bounce back today, but it didn't take long for those hopes to be crushed in overnight trading.  This is the kind of bond market weakness that forces analysts to find/amplify root causes after the fact, because there really hasn't been a strong case for this much selling (even if there's a well-understood case for steady selling in general).  

To be clear, evidence in the "well-understood case" is as follows:

  • Plummeting covid case counts
  • Businesses weathered the Dec/Jan surge much better than the initial lockdowns in the Spring
  • Vaccine distribution improving
  • Economic data at home and abroad has been resilient
  • Massive central bank support
  • Fiscal stimulus expectations (looking like "bigger and sooner" now)
  • Strong corporate earnings, strong stocks, and more of the same expected as sidelined cash flows back into market
  • Heavy bond market supply (ties in with stimulus, since Treasuries are used to pay for it) as well as corporate bond supply
  • Inflation expectations (monetary + fiscal stimulus increasingly expected to stoke inflationary fires).

This list could go on, but that's already plenty of justification for an ongoing rotation/recovery trade that favors stocks and shuns bonds.  It jives perfectly well with the ongoing uptrend in yields that we've been tracking for months and months.  The only surprise at this point is how aggressive the selling has become in the past few days with 10yr yields only about 2 bps away from March 2020's highs (1.26 vs 1.28%).  Bonds are also challenging the upper boundary of their prevailing trend.  Early January increasingly looks like a 'sea-change' moment following the GA senate election (with the late Jan rally now looking like a brutal head-fake).

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This is the sort of thing that CAN be good news as it suggests a bounce back in the other direction, all other things being equal.  But that suggestion assumes the trend continues at the same pace, and that's never a guarantee.  Assessing the validity of that trend will be the first order of business today and tomorrow.  If we don't see a big, strong bounce back in bonds, it may be over.