Bond markets began acting odd yesterday, but in a good way.  It began in the overnight session where US Treasuries outperformed European bond markets.  That was odd because there were reasons for European bonds to outperform (weak EU economic data) and separate reasons for US bond markets to underperform (Treasury auction cycle beginning). 

The wild card explanation here was/is the increasingly vocal conflict between Germany and the rest of the ECB on the topic of bond purchases.  Bottom line, if there is discord when it comes to EU bond buying, it would make sense for European bonds to underperform and for US bond markets to pick up the slack. 

More mainstream possibilities include the simple presence of momentum in October.  As we've discussed on several recent occasions, the fact that October 1st was the biggest volume and movement day during a week that also had an ECB Announcement and an NFP release certainly suggests that the tradeflow momentum associated with the new quarter is significant.  And we could simply be witnessing the continuation of this now unbridled Q4 momentum. 

The other mainstream possibility is that everything is all about the FOMC.  This is a common line of thinking and more often than not, it's accurate.  I'm not so sure about it this time, but at least we'll find out today!  Reason being: the minutes from the most recent FOMC meeting will be released at 2pm.  Remember that this meeting came at a time where bonds had sold off aggressively for the entire month of September, and speculation was rampant that the weakness had to do with expectations that the Fed would change its forward guidance to make rate hikes a more imminent reality. 

As early as the post-Announcement press conference, Yellen attempted to convince markets that the Fed wasn't really any more interested in hiking rates and that the seemingly hawkish shift in Fed Forecasts didn't really mean anything.  Other Fed speeches have pursued a similar thrust.  I.E. "Hey guys... we're not really as hawkish as the forecasts make us seem and we're not even too sure about our forecasts."

This has given rise to yet another topic of speculation for market participants.  Now the thinking is this: what if the Fed minutes add credence to what Yellen and other Fed speakers were saying about the Fed not really being as hawkish as it seemed?  All that weakness in September could have been for naught.  And that's theoretically why bond markets have returned to late August lows on the day before the FOMC Minutes. 

I'm not saying this is what is necessarily going on--just laying out the theory so we can confirm or reject it this afternoon.  If the reading on the Minutes is bond-friendly, then bonds wouldn't move much.  If they do, the theory is bunk and we have a strong momentum situation likely to result in further gains beyond whatever we get tomorrow.  If the minutes are not bond friendly, and bond markets lose ground, we don't really learn that much because even a strong momentum move could have a very normal consolidative pull-back after the past 2 days of rallying and an event like FOMC Minutes is good "cover" to hide behind for such tactical trading missions.

Whatever the case may be, the stakes are high.