Strong Overnight Gains Little to do With Japan; Domestic Data Pushing Back

The US bond market has a borderline preoccupation with certain changes in Japanese monetary policy.  This is arguably justified at times.  Previous tweaks from the BOJ have coincided with big reactions in Treasuries.  One reason is the official selling of Treasuries in order to fund the BOJ's defense of hard ceilings set on Japanese government bonds.  The BOJ lifted the cap overnight.  This prompted an initial, positive response in Treasuries, but the bigger gains arrived after weaker EU data prompted steadier buying starting at 3am.  Yields were as low as 4.805, but have bounced back a bit after the US ECI data.

The following chart shows all of the above.  Yen/USD is used to show the correlation between Japanese monetary policy and US bonds.  German 10yr yields are used as the de facto European 10yr yield.  Treasury futures volumes at the bottom of the chart provide a good sense of the relative level of importance of recent events, but keep in mind that the EU data is deceptively low in its volume response because it played out over a longer period of time.

ECI going down, but still elevated.