Three weeks ago, the bond market made its first attempt to rally toward lower yields after ending the previous week bouncing at a ceiling of 1.75% in the 10yr. Traders were generally upbeat as they moved through the 2 and 5 year Treasury auctions, but the gains fizzled after a weak 7 year auction. That high-to-low move effectively set the sideways range that continues to hold today. Yields are almost perfectly centered in that range to begin the new week.
Treasury auctions, in general, have had a bigger-than-normal impact on bonds over the past few months as they are in a position to serve as a sort of trading range litmus test. This week's auction cycle is accelerated with both 3 and 10yr notes on tap today. Of the two, 10yr Treasuries are vastly more likely to have an impact on 10yr yields and on bonds in general. 3yr Treasury volatility is somewhat limited by Fed rate policy. Reason being: the shorter the duration of a bond, the closer it becomes to the Fed's 'overnight' rate. In a policy environment where the Fed is seen keeping rates low for at least 2 years, there's no incentive for 2yr Treasury yields to be different than the Fed Funds Rate (indeed, they're not) and no reason for 3yr yields to be too much higher.
The rest of the week will be busier than the last. 30yr fixed UMBS will go through their settlement process today and tomorrow, so be prepared to wake up to lower prices tomorrow due to the roll. Then at 8:30am, we'll get our first look at an inflation report impacted by the "base effects" from the low-inflation months at the beginning of the pandemic. The big ticket will be Thursday's Retail Sales report, expected to come in at 5.9 vs -3.0 last time. Traders will also be paying attention to Friday's Consumer Sentiment report due to the Fed's focus on inflation expectations.