Liquidity Continues Flowing Upstream

The buying wasn't about the New York Empire State Index, which measures manufacturing conditions in the New York region, says T.J. Marta, chief fixed-income strategist at RBC Capital Markets. The index read 9.1 vs. expectations of 20. The weakness makes sense, he says, noting that the Fed might get worried about an overheated economy if its 17 rate hikes didn't bring down these measures. Other regional indicators of manufacturing activity also have been soft recently.

"The Asians stepped back in," says Marta, noting Treasury traders were reporting Asian central bank bids throughout the night. "They were notably absent from the game and they came back in" when the 10-year's yield reached 4.8% last week. Given recent ranges for the 10-year between 4.5% and 4.75%, that makes 4.8% a decent entry point, he says, adding that without inflation pressures, he still forecasts one rate cut before the year is out.

The impact of foreign buying on yields is a much-debated subject on Wall Street, as many believe these investors have depressed the long end of the yield curve. Without foreign investors, yields would be 150 basis points higher or 1.5% higher, according to a 2005 Fed study. Their buying is what makes the yield curve "different this time," and not predictive of a recession, argue the authors of that report and many Wall Street economists.