For those that prefer not to overcomplicate things, the current bond market environment can be summed up with one quick concept: rates have broadly leveled off after the fastest/largest spike since the 80s. We know inflation is the key consideration when it comes to rates departing the sideways range. But inflation-related data only comes out so quickly. Meanwhile, volatility inside that range can depend on other inputs.
Apart from inflation and the Fed’s response to it, reactions to various headlines and economic reports seem somewhat random at times. A report that “didn’t matter” last month might prove to be a noticeable market mover next month. So how do we know what to watch? Yesterday it was the ISM Manufacturing data. Today, it’s a combination of data, European bond influence, and oil prices.
EU bonds have had more of a general effect recently, adding to upward pressure on US rates. If we zoom out to a 2-month view, we can see German 10yr yields pulling up and away from US 10s, with the latter arguably doing a good job of resisting negative spillover.
In the shorter term, while oil prices certainly aren’t the only consideration for rates, big pops and drops give bonds something to do when they’re not doing anything more pressing. Most of the past 24 hours qualify as one of those times. Falling oil prices helped bonds find a bid heading into the close yesterday. Speculation about OPEC production increases pushed prices lower overnight and helped bonds hold in unchanged territory. Then in the domestic session, oil began to rise at the same time that ADP data missed the mark. This resulted in bonds freezing in place for a moment despite the highest volume of the day. When oil spiked again, bonds were less distracted by other data.
In general, employment metrics haven’t been top tier market movers of late. While we still probably shouldn’t consider them “top tier,” given the volume response to ADP, tomorrow’s NFP report is at least more interesting than it otherwise would have been.