Sometimes bonds head into a trading day knowing that some key event(s) will hold the potential to push rates decisively higher or lower depending on the outcome.  Other days, there is more of a blank canvas mentality with no clear sources of inspiration.  Then somewhere in between, there can be full weeks of time where some scheduled events may move the needle a bit, but where the market is still waiting on some future event for a bigger cue.  This is one of those weeks and Thursday’s PCE data is the cue… probably.  In the meantime, we’ve seen and will likely continue to see random volatility in what continues to be a sideways range in the bigger picture. 
Today’s version of “trading it out” involves some speculation that tomorrow’s inflation data will be flat-to-friendly relative to expectations.  This is being driven by friendly inflation data in Europe overnight as well as other inflation anecdotes in recent reports.  Granted, those recent reports happened before today, but today is day before the big day, so traders are now forced to rush to the seats of their choosing and to stop playing games.  The fact that EU inflation data stoked the rally overnight merely suggested they choose a more bond-bullish seat in case they hadn’t yet decided.

Why do we have Treasuries reacting to German inflation data when German bonds aren’t trading?  Granted, the report in question did come out ahead of the official start of bond trading in the EU, but futures were trading.  If we compare the futures contracts of the same securities charted above, everything becomes more logical.