The strong bid in bonds continued today after a brief respite on Monday.

Many market participants are asking what is behind the buying in fixed income. One theory is that the bond market saw through the latest non-farm payrolls report and instead is viewing the cracks in things like the household survey or the S&P Global US PMI. There's a healthy debate right now on whether growth or inflation is the bigger risk next year and bonds are saying the inflation has peaked and growth is vulnerable.

I think some of the driver is also oil and relief on diesel prices. WTI crude oil peaked at $130 in March of this year and when the year-over-year comps hit in a few months (assuming a flat price) oil will be down 44% y/y. That's a powerful drag on the CPI and will bring it back to 2% faster than the Fed had anticipated.

So the bond market is signaling both a top in inflation and an economic slowdown. Given those risks, the hurried flight to safety makes sense.

US 10 year daily

Technically, there isn't much support on the yield chart until 3% though bonds are suddenly overbought and that could prompt a bounce if PPI or CPI is hot.

I also worry that we end up with a whipsaw. Housing could be a good example with US 30-year fixed mortgages quickly approaching 6%. That could reinvigorate the home-buying market and kick off more activity then the Fed was anticipating, ultimately resulting in tightening later. Given commodity-inflation dynamics and y/y factors I think that's probably a trade for the second half of 2023 though.

US 10-year yields were last at 3.42%, down 9 bps on the day.