The Week Ahead: About as Busy and as Serious as Possible

For bond markets, and even markets in general, things don't get much busier than they will be this week in terms of economic data, potential market movers, and technical boundary-testing.  Domestically, much has been made of recently more bullish economic data, and it's very true that Jobless Claims reports were central to the story of the bond market's undoing.  In the bigger picture, however, domestic data merely served to galvanize the underlying messages coming from the market's two biggest motivations: Europe's panic premium and FOMC policy.

We've seen what utter panic, pessimism, fear, and abysmal economic expectations look like when they're a domestic affair.  In late 2008 and early 2009, this was only ever enough to get 10yr yield down to the low 2's.  It didn't spend much time their either, even though expectations for economic improvement weren't rebounding rampantly.  It took the onset of more dire chapters in the EU crisis and the FOMC laying its cards bluntly on the table to usher in the new era of sub 2% 10yr yields and Fannie 3.0 MBS liquidity.  

In a few short months, we've seen major evolutions in both these arenas (relative to their other periods of change).  The FOMC Minutes that expressed somewhat less certainty and cohesion with respect to QE through 2013 marked the turning point from assessing whether the Fed would be doing "more than or equal to market expectations regarding easing" to "less than or equal to."  Subtle distinction, big impact.  A few weeks later we have European banks seen paying back more LTRO funds than expected, and sooner than expected!  Markets read this as material evidence that panic isn't as justified over an EU collapse as it was 6 months ago.

Compounding these two broader issues were smaller pieces of specific evidence.  Sentiment surveys and peripheral debt auctions coming in stronger than expected in Europe merely served to flesh out the bearish implications for bond markets, rather than offer counterpoints.  Stronger Jobless Claims data cast additional doubt as to how and when the FOMC will respond to the employment metrics it only recently added to its official policy statement in lieu of the "2015 verbiage."  Bullish equities markets in the throws of earnings season didn't help either (though they did constitute a major source of reflection regarding just how much of this bounce is Europe-related...  After all, wouldn't equities be a bit weaker than "5yr Highs" if they too were fearing an accelerated discontinuation of QE?).

Regardless of how you want to assign the blame, January has clearly not been kind to bond markets.  It draws to close this week, but it's not going out quietly.  the FOMC considerations mentioned above will take the stage on Wednesday afternoon for an official policy statement in the afternoon.  There's the first Treasury Auction cycle in more than 2 weeks running from Monday through Wednesday.  Several major pieces of economic data dot the calendar including Durable Goods on Monday, GDP and ADP payrolls on Wednesday, and The Employment Situation on Friday.  

This week stands a good chance to be extremely volatile, with the fear being that its events conspire to catapult rates even higher within their recent uptrend, while the hope is that they somehow incite a glorious stand against the tide.