Buy the rumor, sell the rumor

As we have been saying for about a week now, the government bond market has been looking very frothy lately. Until recently, their story has been one of booming prices and crashing yields. When the SNB un-pegged the Swiss Franc to the Euro last week, markets assigned an increased weight to the likelihood that the ECB would announce a program of asset purchases at tomorrow’s meeting.

Today, however, we saw a sharp sell-off in the price of government bonds across the US and western Europe. The decline was led by German government notes, the Bund, which declined in the Euro session:

German Bund Futures

German Bund Futures

This put pressure on Italian and French government debt:

French Govt Debt Futures

French Govt Debt Futures

Italian Govt Debt Futures

Italian Govt Debt Futures

All this weighed heavily on the US Treasury market, which saw the 30 Year bond lose over a handle today:

30 Yr US Tsy Futures

30 Yr US Tsy Futures

Traders sought to lock in gains today and transferred their money into global stock markets which are poised to gain reap the benefits if indeed the ECB announces an asset purchase program in tomorrow’s meeting.

Given the market’s expectations and the volatility of the bond market going into the meeting, tomorrow’s Q&A session should be one to remember. It will be very hard for Draghi to please everyone, and their should be a great deal of interest rate volaility as the market’s digest the ECB’s latest communications. 

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