Much like February 26th, overnight strength in the bond market allows us to ask the same obvious question: “is this the bounce?” Much like Feb 26th, the answer is definitely maybe. As of right now, we’d need a much bigger rally to even get serious about the conversation, but it’s certainly “nice” to start the day with a quarter point of improvement in MBS and a 6bp rally in the 10yr.
Can we glean anything from the inspiration for this rally?
This is where things get frustrating from an analytical standpoint. While volumes are strong, the trading is not being driven by the sort of big, obvious motivations that we’d like to see. There’s no news headline, economic report, or bond auction to credit for the shift. Asian accounts simply clocked in for the day and said it was time to buy.
This was especially evident in Japan where a variety of supply/demand technicals are driving demand for foreign sovereign debt. US Treasuries are a solid choice in that regard due to the exceptionally high yields relative to other risk-free G7 nations. In the coming weeks, we may find ourselves talking about the Japanese influence again as Japan’s fiscal year ends in March and major investment funds are in the process of re-allocating assets.
For instance, one overnight anecdote via JPM suggests that a $1.7 trillion dollar pension fund in Japan has an estimated $34 billion to move from equities into bonds by the end of the month. The same report noted several other massive pension funds around the world with similar rebalancing needs.
Of course, if such reports can make the rounds among traders, then speculative investors can try to get ahead of the anticipated moves. Such is life when it comes to predicting the future in financial markets. In other words, these fun little factoids don’t predict the future, but there’s enough variability in their potential outcomes that they COULD contribute to better bond buying than speculators currently expect.
For now, all we know is that yields continue operating in the recent uptrend. They could rally all the way down to 1.48% today without breaking that trend. Even then, the bigger test would be “confirmation” (i.e. spending a 2nd day closing on the other side of some technical target) after tomorrow’s 10yr Treasury auction.