Another Surprisingly Eager Bond Rally Suggests Caution and Opportunity

Two days ago, the focus of the analysis was on the potentially puzzling level of strength in the bond market (i.e. gains seemed a bit overdone relative to motivations). In fact, we welcomed yesterday's bump in yields as something that made more sense in the current context.  The only caveat was that yesterday was "month-end" and we often see directional month-end volatility give way to a reversal on the first day of the new month.  That was the case today, but at best, we could only say the new-month trading environment greased the skids.  Directional inspiration was gleaned from ISM Manufacturing data as well as a "no whammies" speech from Fed Chair Powell.  Any additional grease on the skids would be a byproduct of traders not wanting to be caught not owning bonds today in the event next week's economic data comes in weaker than expected.  If it does, it will officially be the best data-driven confirmation of the big picture rate reversal that we've been seeking for more than a year.  On the other hand, caution is in order due to the obvious lead-off being taken.  In other words, the market is obviously positioning for the scenario where data continues missing the mark, and is thus relatively poorly positioned for an upbeat data surprise.  Such a surprise could cause quite a volatile little spike in rates.