Measures of bond market volatility spiked this morning WELL before the 8:30am GDP reading.  Of course a +5.0 GDP vs a 4.3% forecast will get all kinds of credit for dragging bond yields higher, but to watch markets trade it out, that really wasn't the case.  In fact, it's quite plain to see the massive spike in implied volatility on the chart below (highlighted in red). 

Was it equities markets then?  Did the 'stock lever' pull bond yields surprisingly higher today?  While stocks did move higher (and lower, and higher again) today, there was no clear correlation with bond market movements.  Zooming out the chart just enough to see how correlated things HAD been recently, we can see just how far from a consideration today's relatively modest stock movements ended up being compared to the much bigger move in bonds.

This was definitely a bond-market-specific move and it definitely was as big as it was because of a lack of liquidity.  To revisit the point made this morning: the few folks there are trading something, the more exaggerated the price movement will be when there's an imbalance.  And there was an imbalance today.  It began innocently enough, but really took on a life of its own after the very poor 5-yr auction.  It's a safe bet that at least some of today's weakness was traded with an eye on tomorrow's challenging 7-yr auction. 

The biggest bottom line though, is that there just aren't as many people left actively participating in bond markets at this time of year.  Sometimes the folks who remain can avoid setting off any technical or algorithmic landmines, but if they don't, day's like today happens.  Technical levels are crossed, prompting more selling.  That, in turn sets-off algorithmic selling triggers, continuing the snowball cycle.  The only saving grace here is that past examples of similar holiday breakdowns tend to see a bounce back in the other direction, as was the case in 2011.  That doesn't mean you should float and expect things to improve, but it affords us some hope for moderation at least.