The Bond Rally Spells Trouble

Signs of worry in financial markets are beginning to mount as bonds surge. The yen was the best performer Wednesday while the pound was the laggard after the BOE inflation report. Japanese GDP is up later.   

One of the charts that have been on everyone's screens for weeks is the US 10-year Treasury yield. Trouble in emerging markets early in the year pushed yields lower and despite better risk appetite, they never really recovered. They never broke down either, until today.

They 2.57% level was repeatedly tested and it held. Yields were beginning to move higher again until yesterday's retail sales report added renewed pressure and today that level broke. It wasn't purely a US story. Dovish comments from the BOE and Reuters sources saying negative rates from the ECB were “more or less a done deal” sparked a surge in demand for bonds.

On the face of it, lower yields mean low inflation and slow growth. They also make the US dollar less attractive and USD/JPY slumped down to 101.72.

But it's not only a US phenomenon and with yields moving lower everywhere, the allure of ultra-low Japanese yields improves. That's most visible in EUR/JPY and GBP/JPY where longer-term support levels are giving way. Keep a close eye on those two trades.

Up next is Japanese Q1 preliminary GDP at 2350 GMT. Annualized growth at the robust rate of 4.2% is expected but much of that is due to spending moving forward ahead of the sales tax hike. Unless it's wildly out of line, don't expect much of a market reaction.

Out later are reports on French GDP and final April Eurozone CPI numbers. Keep an eye on Wal-Mart earnings in the pre-market for any hints about the health of the US and global consumer. Markets are on edge and some negative commentary could push them over.