After beginning the day in moderately weaker territory, bond markets have rallied back to nearly-unchanged levels.  With several economic reports out this morning, it's tempting to conclude that the econ data motivated the movement, but things don't line up very well for that argument.

First of all, the Chicago PMI data was stronger than expected (58.3 vs 56.4), yet bonds were clearly rallying before and after the report's 9:45am release time.  We could take a moment to discuss the reaction to the 10am Consumer Sentiment data, but it would be a waste of time.  I'll just go ahead and tell you that it wasn't a market mover.  Moreover, we can clearly see several other sources of inspiration.

The first would be European bond markets where German Bunds have drawn a line in the sand (a sandy ceiling, if you will), at .354%.  After a brief, obligatory response to better inflation data in the 8:30am data, Treasuries took heart in the fact that German Bunds were remaining under their sandy ceiling.  US bond markets began to rally shortly thereafter.

As noted, Chicago PMI didn't get in the way of the rally, and there wasn't much of a response at all to the Consumer Sentiment data at 10am.  Bonds simply rallied after getting close to the week's highest yields.  They rallied a bit more as equities markets fired up at 9:30am.  Both of those developments imply month-end bond buying is helping fuel the gains.

10yr yields are now up only half a bp on the day at 2.305 and Fannie 3.5s are unchanged at 102-24.  

Note: month-end trading creates a greater risk of volatility centered on the 3pm CME close.  It could work for or against us, and it might not happen at all.  Still, it's good to be aware of the potential for bigger moves in the afternoon.  Beyond that, our baseline assumption is for bonds not to make any aggressive moves off the fence (discussed in Day Ahead) until next week.