Today was a more serious version of the same sort of warning shots seen at the end of last week.  At that time, bond yields rose to challenge an intermediate ceiling at 2.835%, but didn't go out of their way to break it.  This week began with higher yields on Monday morning, but a nice recovery throughout the day.  When yesterday's gains added to that recovery, it was tempting to hit the snooze button and go back to sleep.

Today's trading sounded the alarm, at least to some extent.  It might not be loud enough to wake the deeper sleepers out there, but it's important to note that yields have quickly moved back up to the highest levels since before the trade war rally (Fed Day, March 21st).  There weren't any big, overt motivations for the weakness.  As discussed in the Huddle video on MBS Live, it's more like there had been a combination of factors helping to extend the life of the recent resilient streak for bonds and those factors are increasingly running out.

Among these, a bounce in the yield curve  is potentially important, as is defensive positioning ahead of earnings season.  Bond traders were also anxious about a speech from outgoing NY Fed President Dudley this afternoon which essentially confirmed the general assumptions of early 2018 trading.  Specifically, the Fed thinks its headed to roughly 3.0% in the Fed Funds Rate, policy should become restrictive fairly quickly to preempt any potential overheating.  The mitigating factor could be any deterioration in trade relations--something the Fed is definitely concerned about.

By the end of the day, yields had crested 2.87%, making today a "test" for a break above the 2.86% intermediate pivot point.  Holding above 2.86% tomorrow would confirm the break.