Rising Treasury yields in spite of last week’s benign CPI and higher jobless claims numbers and this week on a lower ISM number, gave us important clues to a possible shifting construct in the bond market. We’re now witnessing bond selling in spite of soft economic numbers – an important clue. On a purely technical perspective, bond price action has changed markedly over the last few weeks. Bouts of retail buying in the morning are now met with selling throughout the day as opposed to vice versa.
The possible reasons for this shift in perception are plentiful. Was it tough talk from Korea? Or perhaps the recognition that finally, foreign central bank dollar diversification rhetoric is fast becoming dollar-diversification reality? How about the recognition that the Fed is more hawkish than previously thought? Have the bond vigilantes finally woken up – soured by a paltry yield that didn't justify growing market risk? Or am I just making too much out of recent price action, as the recent surge in yields is just another technical bounce?
Whatever the reason, price is king, as it is the final arbitrator. Price validates our views and confirms our suspicions. Unlike the surge in Treasury yields in Jun 02 and Mar 03 – a surge built on the prospect of solid economic growth – a potential surge today would be built on more ominous reasons. While it is too early to tell, could further bond price deterioration in spite of soft economic numbers confirm the start of the unwinding of, say, FCB held U.S paper, and with it the unwinding of the highly-leveraged U.S consumer?
Watch for more divergence Friday, as more bond selling (rising yields) after a soft Friday employment number could be very problematic.
