March’s month/quarter-end trading got more credit than normal for moving markets in the past week or two. As such, it’s fair to hope for April to bring a push back in the other direction. So far, so good this morning, but we’ll need to see more gains tomorrow and probably even at the beginning of next week to confirm. One key reason for that is the early market closure tomorrow for Good Friday and the Easter holiday weekend. There is a risk that some of the gains today are being driven by traders exiting positions before liquidity gets tighter tomorrow.
Still, a rally is a rally, and it gives us an opportunity to talk about what “confirmation of a friendly bounce” might look like. The most basic metric would simply be to cover a certain amount of ground. In that sense, we’d need a break below the lower yellow trend line in the following chart. For a bigger, more sustained move, we’d need to successfully break below 1.62-63% and hold that for a few days. If that happens, and if bonds continue to rally, we’d reassess around 1.5%, with the goal being to determine whether we’re looking at a longer-term consolidation (not as big of a drop in yields, but more sustained) or a temporary correction (bigger drop in yields, but fleeting).
Regardless of the flavor of the friendly bounce (and sadly, it might not even be as good as the two options laid out above), there are definitely still scenarios where rates go significantly higher before the bigger picture trends roll over and gives way to the next “falling rate environment.” If past precedents are any guide, the 2 biggest examples of “rising rate environments” in the past 15 years saw EXACTLY the same amount of weakness–1.9% (or 190bps) in 10yr yields to be precise. That would put the eventual ceiling at 2.4%.
To be sure, there are economic/fiscal/monetary scenarios where 2.4% makes plenty of sense. There are also scenarios where something goes wrong and 10yr yields never break above 2%. So much depends on the state of the economy post-pandemic, not to mention our ability to use terms like “post-pandemic” in the first place.
On that note, it’s worth mentioning the state of the economy doesn’t seem to be a major concern for bonds right now–at least not insofar as it relates to the current crop of economic releases. Case in point, ISM Manufacturing came in at the highest level since 1983 this morning and bonds are actually in BETTER territory than before the data. Tomorrow’s jobs report could see a more conventional reaction function, but we shouldn’t take that for granted (in other words, a big beat in NFP doesn’t necessarily mean bonds are doomed). Moreover, if bonds survive a big beat in NFP, it tells us more about the underlying trading motivations (and the potential shift that we’re hoping to see in April).