Why So Much Selling in Bonds?

Without a doubt, it’s been a frustrating and puzzling week for the bond market.  Everyone knows that bonds have moved consistently higher in yield, but there is very little understanding and agreement about WHY that move has taken place.  Europe had a rough week, but EU bonds didn’t lose as much ground as US bonds, so we can’t really stop there.  We also know that econ data wasn’t to blame (or if it was, traders bought bonds at first and then changed their minds later in the day–not typical behavior, to say the least).  Beyond those considerations, we’re left with guesses and possibilities that are much harder to substantiate and much more esoteric.  These include things like year-end positioning constraints, a move to the sidelines before the Fed announcement, and curve trading driven by one of several factors.  

Econ Data / Events

Import Prices

0.1 vs -0.2 f’cast, 0.1 prev

Export Prices

0.0 vs -0.2 f’cast, 1.0 prev

Market Movement Recap

09:07 AM Initially slightly stronger overnight, then weaker with Europe.  MBS down 2 ticks (.06) and 10yr up 1.5bps at 4.346

10:01 AM Additional weakness.  MBS down 7 ticks (.22) and 10yr up 3.2bps at 4.362

12:18 PM More of the same.  10yr yields are up 5.8bps at 4.388.  MBS down 10 ticks (.31).

03:10 PM Leveling off near weakest levels with MBS down 11 ticks (.34) and 10yr up 7bps at 4.40

Bonds can’t seem to catch a break this week.  Data hasn’t necessarily been unfriendly either with both CPI and PPI hitting forecasts at the core monthly level (not to mention higher-than-expected jobless claims). Despite that, rates have risen every day this week with the biggest sell-offs ironically on the days with the not-unfriendly data.  Friday is effectively data free with only import/export prices (a report that never has an impact) and bonds are selling off once again. 
We have to agree that there are non-data-related reasons for this week’s weakness, but from that point on, the assignment of blame becomes somewhat speculative.  Opinions range from “pre-Fed positioning” to “year-end balance sheet constraints.”  Those are hard to prove, and maybe we don’t need to have an ironclad scapegoat to simply observe this trend is not our friend until further notice. 
That much is obvious, but what’s next?  It’s always a coin flip, more or less, but if you’re looking for hope, here are a few options.  First, yields just filled an opening gap from Monday Nov 25th.  Some technicians think this is the kind of thing that precedes a friendly bounce.

One could also consider even longer term trends where yields have moved from the bottom to the top of a trend channel that has been intact for more than a year now.  Of course, trend channels aren’t permanent, but if we do happen to see rates show some resilience next week, these technical considerations would bolster the case for that rally to have a bit of staying power.

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Mediocre Data Has Done Nothing to Help Bonds

Granted, this week’s slate of economic data isn’t on quite the same level as NFP week, but neither have offered any seriously upbeat reports. Today’s PPI and yesterday’s CPI both hit forecasts at the monthly level.  Jobless Claims certainly weren’t bullish for the labor market. Bond traders even jumped on a quick AM rally in response to the 8:30am data (both today and yesterday). But like yesterday, it was over soon after it began and the rest of the day was dominated by steady selling.  We can blame heavy selling in Europe for the timing of today’s reversal, but Treasury traders kept the bad times rolling well after EU markets closed.

Econ Data / Events

Core Producer Prices MM

0.2 vs 0.2 f’cast, 0.3 prev

Core Producer Prices YY

3.4 vs 3.2 f’cast, 3.1 prev

Jobless Claims

242k vs 220k f’cast, 224k prev

Market Movement Recap

09:35 AM Slightly weaker overnight, recovering a bit after data and weakening a bit with EU markets after ECB announcement.  MBS down 1 tick (.03) and 10yr up just under 1bp at 4.292

02:02 PM MBS now down 6 ticks (.19) on the day 10 yr yields are also up to new highs for the day at 4.320%.

03:26 PM Weaker still… MBS down 9 ticks (.28) and 10yr up 4.3bps at 4.327

This morning’s Producer Price Index (PPI) came in hotter than expected in year-over-year terms (3.4 vs 3.2 at the core level). Traders were mostly able to look past that given that the most recent month was in line with forecasts. Jobless Claims data helped facilitate gains between 8:30am and 9am ET, but shortly thereafter, the European bond market began selling off somewhat aggressively in response to today’s European Central Bank (ECB) announcement and press conference.  The correlation between EU and US yields is clear and it has resulted in US bonds moving back into negative territory. 

There’s some context on Jobless Claims as well.  Despite being the highest level in more than 8 weeks, it’s not necessarily an abnormal seasonal spike.  The following chart shows the non-seasonally adjusted data compared to other years. We’re right in line with 2019 at the moment, and not far off the post-Thanksgiving week spikes of 2022 or 2023.