Written before today’s ISM data: As of Monday afternoon, 10yr yields had spent 3 days breaking below a floor that had been intact for more than 3 months, falling nearly 20bps in the process. Tuesday’s trading session offered up a big, nasty reset to the bullish breakout, depositing yields perfectly above the technical floor.
All this for what? Fed speakers reminding markets that inflation isn’t beaten yet and that 50-75bp hikes are still on the table? That’s one way to look at it, but the lens is arguably too narrow. A more holistic view is that the recent rally was fairly mature and possibly a bit too aggressive considering we had yet to fully confirm a shift in inflation. Perhaps this is why Daly’s comments (Fed’s work on inflation is nowhere near complete) resonated yesterday morning. The rapid, sizeable ramp in corporate bond issuance didn’t help the bond-bearish sentiment.
Either way, that holistic view supports the “reset” thesis, thus begging the question: was it enough of a reset for buyers to see a buying opportunity? The next 2 days will provide an answer to that question. If it’s an obvious answer, we might get it by close of business today, in the form of a lead-off rally ahead of tomorrow’s jobs report. If traders remain conflicted, but lean toward “yes,” we could see a flatter trajectory. Either would be victories. We’ll cross the bridge on the other potential outcome if we come to it.
Written after today’s ISM data: There was an interesting little lead-off rally ahead of ISM, but the fairly excellent headline sparked immediate selling pressure. It was only somewhat offset by a nice drop in “prices paid.” Factoring out the lead-off, yields are only 3-4bps higher than pre-ISM levels. This feels like a perfect reflection of a data-dependent bond market.
In other words, this morning’s trading seems to confirm that it’s not too soon to talk about a friendly bounce after yesterday’s unfriendly bounce, but any such gains would depend on confirmation from weaker economic data. With ISM being decidedly strong, we’re left with moderate weakness. If bonds manage to rally back to unchanged levels or better by the end of the day, we can be all but certain that the recent selling has identified this week’s weakest levels as buying opportunities.
The following hourly candlestick chart shows the potential support at 2.817. Yields briefly broke above that after ISM, but then recovered back below.