What to do if the bond rout continues

The bond market has been in a bull market for more than 30 years but this could be the end. The pound was the top performer Monday while the kiwi lagged. Australian housing data and the Federal budget are due later. A new GBPUSD Pemium trade was issued.

Friday's soft non-farm payrolls report barely left a dent in the bond market rout. The long end is leading a push higher in yields throughout most of the globe.

The catalyst for the final push lower in sovereign yields was ECB QE and it contributed to driving Bund yields as low as 0.08% but signs of better growth in Europe and the Fed preparing to hike, traders have stampeded out. Bund yields rose another 6 bps Monday to 0.61% and T-note yields climbed 13 bps to 2.28% -- the highest close of the year.

Blips in bonds have been part of the landscape for as long as the bond bull market has been taking place. With the ECB continuing to buy, this isn't likely to be a V-shaped turnaround but it may dominate trading in the weeks ahead.

The fall in the kiwi was widely blamed on rate cut expectations Monday but the move in OIS was only about 4 basis points. The larger driver was the unwind of the carry trade and that's a trade that can gain considerable momentum.

It's also important to note that USD/JPY rose Monday even as stocks fell. Although sovereign yields may rise in many advanced countries they're unlikely to move as significantly in Japan with the BOJ holding such a large portion of supply. That divergence could be the source of another led in the USD/JPY rally.

The euro may also be a beneficiary with many carry trades funded in euros. We noted yesterday that CFTC positions still show significant EUR shorts and those remain at risk. Ultimately, the market believes ECB buying will cap European sovereigns but bund rates back up to 1% would still cause considerable pain.

In the hours ahead, the Asia-Pacific trading calendar isn't particularly busy. The lone notable release is Australian housing finance at 0130 GMT. Home loans are expected up 1.0%.

Later, the Australian government is expected to deliver a simulative budget and that may be mildly supportive for AUD.