We are starting off the week on a positive note with the bond/mortgage markets up marginally from what was a pretty rough Friday. These markets were hit hard as the day wore on Friday but I cannot help but think it was a healthy sign of a functional market. While there are a lot of people out there that are predicting a eventual 1.0% 10yr, I for one am on the fence with this, we may have gotten a little ahead of ourselves.

This is a very normal market move when the majority of folks think one way then when it does not happen with the instant gratification that traders like the remaining few who think differently push the markets in the opposite direction. So when the ICB’s Draghi came out with his “we will do everything possible to keep the EU together” comment last week it brought the bond market bears back and put a temporary hold on the push to a 1.00% 10yr…at least for now.

So what needs to happen for us to get back on track for another push down in bond yields? A couple of things…

• First and foremost the EU has to lose Greece and possibly another country. Losing Greece alone will probably not do it because that is pretty much priced into the markets. The geniuses at Citi actually pegged the exit of Greece @ 90% but let’s just say the opinions of Citi are not exactly EF Hutton material (younger readers might need some explaining of what I mean by that). If Greece leaves with say Spain then let’s just say that the proverbial shit hits the fan. Like I have said in the past many believe the end of the EU will result in Spain leaving. This explains why the leaders of the EU are adamant about doing whatever is necessary. But can their efforts be enough? We will see.
• Second would be a really bad NFP report this Friday. Now this alone will not get us to a 1.00% 10yr but if the report is Mets bullpen-like weak then it definitely pushes us back into bond market rally mode. A really weak report would solidify the prospects for another round of Fed easing in the form of QE3 and this will push yields lower.

So we are at a little bit of a crossroads right now and in a wait and see mode. With the 10yr @ 1.54% it is about 25bps off the all-time highs but still very low which signifies investors are still very concerned about the EU crisis. Will reality set in and will the markets disregard Draghi’s comments and go back to the flight-to-quality trade? Or will the EU make strides to implementing a plan that makes investors less concerned about the future of the EU?

Maybe we get these questions answered this week and then we have our own market mover with Friday’s NFP report. Therefore this week is a big one because it may set the pace for what to expect in the immediate future as to whether we return back to a 2.00% 10yr or head back down towards 1.00%.