Heading into today, we expected the bond market to ignore potentially stronger Retail Sales data.  Not only did bonds overlook the big beat (9.8 vs 5.9 f'cast), but they actually rallied in response.  This was made all the more remarkable by the presence of 3 other better-than-expected economic reports that came out at the same time.  So what's driving the gains?  That's a long story, including technicals, corporate bonds, overseas tradeflows, and the general front-running of post-covid Treasury range.

As far as overseas flows are concerned, much has been made of Japan's heavy participation in US debt.  While the participation is nothing new, the narrative of "heavy selling" in March was quite prevalent in certain circles.  The theory was that Japanese investors were drastically lightening up on US debt as a part of the country's fiscal year-end process, and that we might have hoped to see a reversal of that dynamic in April.  So now that April is off to a great start for bonds, is it all thank to Japan?

Maybe!  It's true that Japan sold bonds in extreme fashion recently, but it was in February, not March.  The following chart shows the last year of net long-term foreign bond purchases.  The most recent bar represents last week (the first full week of April), in which Japanese investors bought a net $15.8 bln in foreign long-term debt.

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Notably, Japan has been a net buyer for the past 4 weeks.  Incidentally, this is about the same time that Treasury yields leveled off.  While I would contend that last week's Treasury rally should have been bigger if Japanese tradeflows were the key driver of US rates, the correlation with general momentum can't be denied.  It will be interesting to see how Japan's weekly report comes out next Thursday in light of this week's sharper gains.

In terms of key levels, 10yr yields are currently breaking through the 1.585 floor.  That's the best thing that's happened to bonds in a long time.  The next major pivot point (and a target for many of those calling for additional gains) is 1.50%.  That's not a promise that we'll get there--simply that, if we do get there, traders are likely to heavily reassess their bullish leanings.

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