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Starting Out With a Chance

Bonds had a scary overnight session with 10s hitting highs of 4.884 around 3am ET.  They rallied a full 15bps over the next 6 hours, most recently with help from the weaker ADP reading.  90 minutes later, the as-expected ISM data is standing aside to allow bonds to go where they please.  Big rallies are unlikely considering this week’s big to-do is still Friday’s jobs report.  Simply holding on to some of the gains from the morning would be a victory. Bonus chart, unrelated: oil prices vs bond yields.  If we zoomed out, we’d see strong correlation since July and generally good correlation since 2015.  Many have observed that higher oil prices bode ill for inflation, thus making bond weakness a rational result.  The past 2 weeks show us that the correlation is highly inconsistent over shorter time horizons.  In fact, the same could be said for the past year and a half with oil falling by roughly 40 dollars and yields rising by more than a point and a half.

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