- Yesterday's fears: that the gains were just a byproduct of trading positions
- Particularly, bond bears were covering bets on higher rates
- Traders getting neutral ahead of tomorrow's ECB Announcement
- Today: yet another day without any big-ticket economic data
- Yet another day at the mercy of 'tradeflows.'
What is a tradeflow? Tradeflows refer to the broader phenomenon of market participants opening and closing long or short positions. Take, for example, an investor who opened a new "short position" (selling bonds) as rates began rising. When rates break higher through a certain target and then fall back below that target, the trader would likely "cover" or buy back the bonds they sold short when rates were lower. In this sense, "short-covering" is "profit-taking." This is one way that tradeflows can step in to stop a sell-off.
Some combination of that short-covering scenario was in play
Unfortunately, that's not an organic source of momentum for bond market rallies. It's more like an epilogue to the story of weakness that bonds have been telling since February
Bottom line: yesterday had all the trappings of a bond market that was simply finding more neutral ground ahead of tomorrow's ECB announcement. With Draghi expected to announce "something" (no one knows exactly what it might be), investors are doing their best to be ready for any reaction. Either way, when a big central bank will potentially make a big change, the movement can be fast and volatile.
For what it's worth, tradeflows are far from the only story in play. We are still caught between the opposing forces of the "risk-on" movement in stocks/oil and the European bond market rally fueled by hopes of a bond-friendly ECB announcement tomorrow (not to mention the general European economic malaise that necessitates such measures).