Trying to make sense of the bond sell off today.

The correlations are broken. The dollar is dumping on a soft GDP report; the thinking being that the Fed will wait longer to hike because of a soft economy.

Makes sense right?

It does until you look at the bond market. It's doing the opposite. Treasury yields are ripping higher, implying a more hawkish Fed.

US 10-year yields instantly plunged to 1.99% from 2.03% on the GDP data but have promptly rebounded to 2.06%, the highest in 5 weeks.

It's a similar story at the front end with 2-year yields at a one-month high. Even Dec Eurodollar futures are down today after a little spike on GDP. It implies the bond market doesn't believe the Fed will be more dovish.

Or is it a massive unwind of a big macro trade?

Major macro traders like Bill Gross and Jeff Gundlach have been touting German Bund shorts and there is something going on in Europe. Bond yields there have shot higher, with German 10s up 12 basis points to 0.285% today alone.

That could have FX implications as well.

"It appears many foreign buyers of Bunds did so on a currency-hedged basis while many holders of Treasuries did so un-hedged, thinking additional USD gains would augment the yield advantage," writes Bob Sinche of Amherst Pierpont today.

So if those unwind, it means that Bund as foreign buyers sell Bunds, they'll have to buy euros and sell dollars to take the hedge off. That's probably the best bet for what's happening today.

German Bunds -- looks like a rush to the exits, no?

The short version.

We know that FX traders are short euros and long dollars but it's also a gigantic trade in bond markets. All the foreigners who front-ran ECB QE via German bonds are getting out of the trade. Because they hedged the FX side of the trade by selling euros and buying USD, they have to reverse the trade.

By the same token, many Europeans may have bought Treasuries unhedged, expecting the euro to keep falling but they're now feeling the FX squeeze.

Even shorter version.

All evidence points to this as a pure euro short squeeze.