How Real is the Bond Market Rally?

By: Matthew Graham • Wed, Mar 16 2011, 3:14 PM

Markets are complicated these days. AQ made mention of it HERE last Friday when he mixed together a fresh pot of "poop juice".

A question many rate-watchers seem to have is whether or not bonds would be rallying without the extremely unfortunate events unfolding around the world. Is this just a flight to safety? One that will eventually evaporate?

10s are breaking all sorts of resistance levels.....

While it's impossible to know exactly how markets would be behaving given alternate realities, it's easy to see that the EXTENT and PACE of the stock sell-off and bond-rally would have been lessened without tragic events abroad. From that perspective it's understandable to view current rate gains as short-term in nature. Evidence of a potential shift "down in coupon" is however starting to build against that case though. This is only the beginning though....

"Real money" has yet to demonstrate a commitment to rally. We're looking for a "duration grab". Swap spread tightened as rates leapt lower today. This is an early indication of real money hedgers preparing for a potential move "down in coupon". That is an encouraging sign, but it could also be a preventative maintenance hedge against day trading and volatility and corporate issuance. This is only the beginning of what could be lower rates. This progress must be sustained.

Plain and Simple: The longer rates hold near current levels (don't break key support levels), the more likely it becomes that rates will fall further. More wait and see....still waiting for confirmation.