When we pondered the possibility (or frankly, the likelihood) of core inflation numbers hitting 3.0%+ several months ago, there was no way to know exactly how the bond market would react.  We got our first glimpse from the ultra-hot CPI numbers 2 weeks ago when bonds spiked at their fastest pace in more than 2 months only to calm back down by the end of that week.  Now today, another core inflation reading over 3% registered an almost imperceptible reaction. 

Translation: for now, bonds believe these spikes will be transitory.  Before covid, you'd have a very hard time convincing anyone that the spike following chart could coexist  with what has been the narrowest trading day of the week so far.

In fact, it's been hard for bonds to find any major motivation since the successful defense of ceiling levels around 1.70%--an effort that began with that same CPI report 2 weeks ago.  It was reinforced in the following week when yields were able to look past the innocuous mention of taper talk in the Fed Minutes (probably because it was innocuous?!).  And while it's true yields have drifted lower since then, A) that's really the only place they could have gone if they weren't going to break technical ceilings and B) the best day of the rally seems to have coincided perfectly with the apex of "calendar roll" trading.

We rarely talk about this someone esoteric concept, but the calendar roll is actually pretty simple.  It involves traders exiting positions in a soon-to-expire Treasury futures contract and rolling them into the next quarter.  In other words, the contract everyone's been trading since the end of March (which settles at the end of June) gave way to the next contract (which settles in September). 

As soon as that September contract trading ramps up (late May, in this case), the front contract is simultaneously ramping down.  The hand-off from one quarter to another creates a flurry of buying and selling activity that can add to volatility in prices.  Sometimes it helps.  Sometimes it hurts.  This time it helped... at first, but most of those gains came out in the wash yesterday.  (Note: the following chart also includes German 10yr Bund yields as some of the late May bond bullishness was driven by solid gains in EU bonds).