The epic interest rate spike and U.S. bond sell-off during the past few trading days is generating a fierce market debate.  The bears see it as the beginning of a new phase of the crisis, where sovereign debt woes spread from the European periphery to the other high deficit/high debt countries.   The bulls view it as the markets revising global growth upward and a mass reallocation out of bonds into risky assets.

The ”confirmation bias” of the bulls and bears is very much like the “Young Lady or Old Hag” illusion.  What you see depends on your predisposition, previous exposure, and what you really want to see.    The bears see the old hag and the bulls see the pretty young lady.

In the context of Keynes’ “speculation is a beauty contest” analogy, our job as traders, at least in the short term, is to render irrelevant what we see and to determine what the market sees.   And it appears, for now, the market is determined to see the young lady.

One thing we do know with almost certainty, however, is that  young ladies turn into old hags over time.  Our job as traders is to determine how fast this young lady ages.  Stay tuned!