Yesterday was great!  While we could poke holes in motivation for such a big rally by pointing out that it began from the weakest levels in 8 months, among other things, it was still the biggest and best move we've seen since March 18th.  To be sure, we will poke some holes, but let's focus on another positive or two, for a moment.

The rally completely defied the economic data.  Retail Sales and Import/Export data both suggested bond market weakness.  Yet we saw only a brief feint higher in yields before improving convincingly.  There was an utter absence of any tense moments from there on out.  This is VERY out of character for bond markets recently.  Even during the moments where we're not taking our lumps, there have still been questionable moments that have increased reprice risk.

While there can be (and soon will be) valid enough explanations for defying the data, bond markets also went on to a resoundingly positive 30yr auction.  This takes some more doing!  It's especially impressive in light of the fact that the rally was already quite strong leading up to it.  Normally, the auction would be better facilitated by weakness leading up to it.

These are both strongly positive aspects of the large improvement.  As with any big bounce, they stand every chance to be the starting point to a larger, longer-lasting move back toward less stressful rates.  The catch is that these positive anecdotes have essentially nothing to do with our chances of seeing such a bounce.

In other words, it's not as if we can say "because the rally defied the data and because the auction was strong in a situation that normally would have made it weak, we can have more hope that this bounce sticks."  The reason we can't say that is that Europe was the unseen hand that made all of the above possible.

By 8:52am yesterday, German Bund yields had rallied from 1.03 to .88.  Bunds should thank Bonos and BTP's (Spanish and Italian bonds).  Both rocketed from over 2.30 to 2.10 before the Bund rally ever really took shape.  The message was clear for anyone with open bets on rates moving higher: time to book your profits!

When you bet on higher rates, you are effectively a seller.  You cover that bet by buying.  There are all sorts of instruments that accomplish these selling/buying functions.  The point is that once rates start moving lower with a bit of momentum after a brutal surge higher, there is usually an ample "short base" (contingency of traders who are betting on rates moving higher) that is forced to cover their bets on higher rates before things move any farther against them. 

NOTE: By the time Italy had rallied 20+bps and Germany had rallied 15bps, US 10s had only rallied 7bps!  Traders were waiting for the 30yr auction! 

We often talk about an "auction concession" as the sort of weakness preceding an auction that makes it easier for traders to bid.  This was yesterday's way of building in that concession.  Once the auction was over, Treasuries joined the rest of the free world in covering shorts.

So is it good?  Bad?  Indifferent?  What?!

Typically, short-covering rallies are an after-effect of something that came before (as opposed to the first sign of something new).  But this doesn't mean something new can't begin today.  Whether or not it does, probably depends on what European bonds do with their range.  As for yesterday, German Bunds simply retreated to their exact lower bound.  If they were to break convincingly below this zone, more good times could roll.