Yesterday’s closing commentary, entitled “Stronger Case For Stability But Not Complacency” acknowledged the reassuringly sideways vibe offered by the first 4 days of this week’s trading but warned “without some fundamental shock to the economy or covid outlook, we won’t be surprised if this rally has a tough time making huge progress toward lower rates.” That’s pretty vague, but the overnight trading action has offered clarity.
Rather than the general notion of a “tough time making huge progress,” we can now observe a blatant unwillingness on the part of 10yr yields to break below 1.62%. This strongly reinforces the other comments from yesterday’s recap, which said the recent strength is best thought of as a sideways consolidation, and that the case for higher rates remains compelling in the bigger picture. While it’s an uncomfortable place to be, at this moment, it’s impossible to know if today’s weakness will end up marking the reinvigoration of a selling trend or merely a token bounce in a new sideways range. Said relapse could only be confirmed with a break above 1.75%.
If early trading is any indication, there’s some hope. 10yr yields managed to hold a ceiling at 1.68% this morning, which is roughly in line with a pivot point from earlier in the week (floor on Monday and ceiling on Wednesday). The bounce coincides with European bonds finding their own ceiling. Many times, when EU bonds are selling at this time of day, US bonds end up catching a break in the afternoon after EU markets close. That optimism needs to be tempered with a healthy respect for next week’s Treasury auction cycle. Traders may be hesitant to chase a rally on the Friday before an auction week.