As we watched yesterday's rally continue to extend into the afternoon without any compelling motivation, it began to seem slightly overdone--especially considering the movement below key technical levels in yields (i.e. 10yr under 3.50%).

While 10s are still under 3.5% this morning, the margin is a bit smaller.  Sellers surfaced instantly in Asia in the overnight session and early domestic trading doesn't seem opposed to pushing back on the recent rally.  Higher yields would be the more logical move in the rest of the week if we're expecting things to look more indecisive ahead of next week's key events.  That doesn't mean bonds can't rally, only that some weakness should be the less surprising outcome.

All of the above having been said, it's not really possible for bonds to do anything too interesting until next week.  None of the movement of the past few weeks means much in the bigger picture.  We're just now getting to the bottom of an exceptional trading range fueled by panic over runaway inflation and the resulting implications for Fed policy.  10yr yields in the 4%-ish zone only ever made sense if inflation proved almost completely unresponsive to monetary policy efforts.

The last CPI report and other economic data may get additional validation for the notion that inflation has turned a corner from next week's CPI report. A day later, the Fed may say something to acknowledge that in one of several ways, even as they hike rates 50bps and upgrade their terminal rate outlook.  A big win in the CPI/Fed combo would make a case for re-entry into the "still bad" range below.  Clearly we're already toeing the line.