This week is big on data. And since the biggest stuff (ECB rate and maybe QE decision and US jobs) is coming today and tomorrow, I figured I’d give it to you all at once over the weekend. In the meantime, here’s me thinking on the bond market:

I can recall past moments when the Fed raised the fed funds rate and mortgage rates—to the surprise of many (mortgage brokers even)—actually declined in response. I would explain to the confused that the bond market was simply expecting it to work. Meaning the Fed raises interest rates to cool economic growth. And a cooling economy means less demand for loans—and everything else—and, therefore, lower interest rates.

Over the past couple of days I’ve read a couple of commentaries that suggest that what I just described—yet lower bond yields—is precisely what we should expect when the Fed finally begins tightening a bit. While they may be right, this time around, I’m not so sure.

My not-so-sureness stems from the fact that today’s bond market has been anything but predictable. As I’ve been reporting, the U.S. economy is showing legitimate signs of legitimate growth, which you’d think would send bond prices—from these levels—reeling and rates rising. And, lo and behold, we get the opposite (a bond market rally). Yes, there’s trouble, and coming QE, abroad—sending sovereign bond yields in riskier geographies as low or lower than you can fetch for a U.S. treasury. And, yes, the U.S. budget deficit is a good $trill lower than it was a couple of years ago (less demand from the U.S. govt). And, yes, we have a Fed that—while tapering QE to zero by October—stands ready to fire up the printing press at the slightest provocation. But, nonetheless—and a 0.9% German bund notwithstanding—things are so atypical that I have a sneaking suspicion that the bond market may deliver an aggravated response—higher spiking yields—to the imminence of a Fed rate hike.

What I’m suggesting, along with the above, is that folks are in bonds because the Fed is in bonds. I know, the Fed’s gonna stop buying soon, and folks are, nonetheless, still buying. And it owns $4 trillion worth that it can reinvest (buy more bonds) as they mature. And, again, folks believe that if things get bad, the Fed will buy even more. Of course there’s the “unwinding” debate—how will the Fed ultimately divest itself of its monster balance sheet—which is the stuff of future commentaries.

I’m just thinking (I could easily be wrong) that bond investors collectively are thinking outside the typical box these days and, bolstered by a most accommodative Fed, are trying to squeeze all they can out of their positions—as opposed to buying/holding in anticipation of an economic slowdown. And that when the bell finally rings and the fed has to ease off the accelerator, they may, collectively, step away and send yields higher, a lot higher, at least for a bit…