Bond Market’s Melt-Up Has All the Hallmarks of Fear

A whiff of panic enters the bond market.

Photographer: Robin Utrecht

Earlier this week I wrote in a column that the relentless rally in U.S. Treasuries had been very orderly and logical, as Hurricane Harvey and North Korean provocations combined with disarray in Washington to force any remaining bond bears to concede defeat. Since then, something has changed in that a whiff of panic has crept into trading activity in what can only be described as a "melt up" in bond prices.

While the mix of news in terms of politics and economics hasn’t changed much, unexpectedly dovish comments from European Central Bank President Mario Draghi early Thursday contributed to a visible change in trading patterns. Offers to sell bonds have grown sparse, liquidity has deteriorated and the tone can best be described as near panicked and "grabby."

It is human nature to look for root causes when markets go vertical, but the bond pundits are having extreme difficulty explaining this latest move higher. Besides some weak inflation reports, the economic data have been quite favorable for bond bears. The labor market remains strong and riskier assets haven’t stumbled much despite the diminished odds of major tax reform.