The US Treasury market has certainly made things interesting so far in April.
On just the second day of the month, the high yields in 10-years have broken out, rising above the 4.35% double top to the highest levels since November.
If you want to stretch for a reason for the 19 basis point move this week, you can point to Powell’s less dovish comments on Friday along with a better ISM manufacturing report yesterday.
The fixed income team at BMO doesn’t find that to be a compelling reason and today’s eurozone inflation data certainly highlights how risks are two sided. They point to upcoming data this week as more important than what we’ve heard already starting with JOLTS today but highlighted by ISM services and non-farm payrolls later in the week.
It’s this backdrop that
makes the selling pressure currently evident in the Treasury market so
fascinating and likely more about the calendar turn, positioning, and specific
flows than any true fundamental shift. Sure, it’s typical for the start of a
new month, quarter, or year to see an unwind (at least partial) of any
constructive tone associated with extension buying. What’s unique about the
current episode is simply the magnitude of the backup in yields and how quickly
the move has occurred. The weakness seen during the overnight session also
implies that the price action might not have completely run its course and
there could be follow-on selling in the event technical support levels of note
are convincingly broken
They note that 4.50% is back on the table and ‘certainly achievable’. Yesterday, I highlighted a technical pattern aiming for 4.65%.
What I find compelling is that the FX market isn’t really buying into this bond move, suggesting that BMO isn’t the only one skeptical that it’s fundamentally driven. Equities are soft today but do futures down 0.6% really validate such a big breakdown in bonds? Gold certainly isn’t fretting as it hits new record highs.
On the other hand, maybe this is a signal that shouldn’t be ignored as bonds often move first.
In any case, this certainly raises the stakes for the rest of the data this week, along with the heavy slate of Fed speakers.