Halfway through the day and domestic bond markets are very close to levels not seen since May 8th.  10yr yields are challenging the important 2.14 inflection point and are already stretching the boundaries of the consolidation patterns discussed in this morning's Day Ahead.

Overnight trading was the first major positive, with German Bunds rallying aggressively out of the gate.  Treasuries benefited from the Bund rally as well as the ongoing overnight movement in currencies where strong swings in the dollar are said to have brought in foreign interest in US debt.

As the domestic session approached, the overnight rally was giving back some gains.  Stronger internal components in the Durable Goods data didn't help, but bonds never committed to weaker momentum.  Keeping in line with the overnight theme, a strong move in the dollar continued to offer support. 

The 10am data, while stronger (read: bad for rates), also showed cause for concern in the Consumer Confidence internals (read: good for rates). This could be one of the morning's dark horses as far as fundamental data is concerned.  The "Jobs Hard to Get" component--which serves as one of the many anecdotes for NFP numbers-- ticked up notably.  In addition, current conditions were stronger than expectations.  The inflation outlook also weakened. 

Once trading levels surpassed their best levels of the morning, momentum picked up significantly.  The fact that 2yr yields are in negative territory vs 30yr yields being more than 8bps lower tells us that traders are covering previous bets on a steeper yield curve. 

In other words, there were widespread bets on shorter term yields staying lower relative to longer term yields heading into mid-May (this had much to do with concerns over Europe turning a big corner).  Today's action suggests those bets have been getting forced to cover (meaning that longer maturities are falling in yield while shorter maturities are holding steady or losing ground).

With this week's auction supply being in the short end of the curve and with month-end buying tending to favor the longer end of the curve, the so-called "flattening" is no major surprise in and of itself.  But we could just as easily have been flattening the curve while moving higher in yield across the board.  As it happens, the flattening and the organic rally motivations are working in synergy.   

All that having been said, keep in mind that the "forced" trading mentioned here is not the sort of thing that has a lot of staying power in terms of rally motivation.  Unless we're breaking convincingly below the key technical levels (such as 2.14 in 10yr yields), we might be concerned that today's rally has run its course.