The Day Ahead: Wax-on, Risk-off? Yes Please...

Bond markets traded well on Monday.  In fact, 10 yr yields dropped more than any session since early November.  Then again, they were starting out the session in line with the highest yields since mid April 2012.  This means that 10's have essentially survived day two of the sort of "do or die" situation they found themselves in after yields rose to multi-month highs for the second time last week.  The first instance--at least during domestic hours--of 10's hitting the upper middle 2.03's followed the FOMC Announcement.  The tense situation above refers to yields revisiting the exact same levels both before and after Friday's NFP (with a massive 10bp+ spike in between), take a look:

The most recent red candlestick touching the upper teal line represents the last hour of Friday's trading.  The adjacent green candlestick is the first hour of Monday's trading.  While we haven't triumphantly broken through the dotted resistance line around 1.955, we certainly were able to complete the "wax-on, wax-off" between recent highs and lows.  This is an appropriate reference for the current environment as the themes of "risk-on vs risk-off" are very much in play.  The chart's not quite as tidy as Treasury's, but take a look at how stocks had their own version of a big risk-on move (equities higher / yields higher) on Friday, which was subsequently unwound in Monday's risk-off move (equities/yields lower):

We call attention to the correlation and the technical levels (at least for Treasuries) not only to hang on to some heroic hopes of defending the ceiling at 2.04 (and hoping to confirm with a break through 1.955, and better yet, 1.92!), but more importantly because the balance of the week is likely to contain similar themes.  Reason being: there's not much else going on domestically.  Tuesday's data is limited to ISM Non-Manufacturing.  Monday's data wasn't even traded upon (Factory Orders... no one cared), yet volumes were huge.

Like we suggested in the Week Ahead, Monday was likely to be interesting because it was likely to contain these necessarily higher-than-average volumes in the absence of above-average levels of event-based guidance.  In other words, the backdrop and the scripts were taken away and markets were essentially left to their own devices.  Suddenly, Europe is interesting again.  If that continues to be the case, then rooting for a bond market bounce back could be more than wishful thinking.  The following chart of German Bunds (the EU's version of the US 10yr) in teal overlaid with 10yr TSYs is a compelling argument for US markets to think twice before waxing-on again.

To see Bunds tell their side of the story, Feb 1st wasn't even a threat to late January yield highs, Monday was more of an afterthought that served as a jumping off point for a more aggressive move away from recently higher yields.