Traders saw financial markets as being driven largely by the moves in fixed income, especially the persistent demand for U.S. Treasuries, seen even with yields nearly back at the lowest levels seen since Oct 30, 2013, when 10-year yields bottomed around 2.473%.
That U.S. yields could not press higher on upbeat data sets in prior sessions, and today did not firm on weekly jobless claims and CPI, suggested something is at work, but what? traders asked.
“Yields are driving the boat,” one trader said. The thinking is, “What do they (in fixed income) know that we don’t know?” he said.
In terms of overall bond demand, it was a perfect storm with UK bond yields moving lower in the wake of the Bank of England’s release of its Quarterly Inflation Report Wednesday, which did not move UK rate hike expectations forward as expected, and euro zone yields moving lower on disappointing Q1 euro zone GDP data as well as European Central Bank easing expectations.
The negative spillover from fixed income was evident in stocks, commodities and FX, traders said.
Credit Suisse strategists observed U.S. Treasuries continued to “react perversely to economic data, with yields breaking lower out of their range despite a significant upward surprise in PPI inflation.”
There was a similar lack of reaction to Thursday’s release of CPI and weekly jobless claims.
“Typically, this type of behavior signals a market in some advanced stage of distress,” they said in a research note.
“A market in some advanced stage of distress” is so vague it’s unhelpful. Mix the prevalence of yield trading with the energy sector leading and technology’s recent blow to the chin, and the case for our economy being somewhere late-cycle looks much stronger.
