3rd May 2011
Bond Overview

Bond markets have been steadily creeping higher over the last week, partly consolidating the recent moves higher as well as looking to build on recent strength. The major catalyst for UST strength over the last week was the perceived dovish FOMC statement. Bunds remain firm, and although have only steadily edged higher taking out the previous week’s swing highs, positive momentum is being buoyed by the elevated peripheral debt yields.

Thoughts from the Trading Floor

From a technical perspective, German Bunds have potentially staged a key weekly reversal. The market has recovered form firm support at 3.5%, which coincided with the 119.85-95 area. The market had then formed a bullish outside weekly bar, with the break of the 121.25 level signifying a weekly reversal in trend. Since then, the market has formed a base around the 122.50 level, and has traded to just shy of the 123.00 handle over the last 2 days. The next key level for bunds is the 123.21 level. If this is breached, the market targets the highs made in the aftermath of the Japanese earthquake, around the 124.00 handle. A move through here will be required if the market is to confirm a turn higher on the medium term weekly timeframe. Until that point, this recent bullish action remains a short-term correction to the medium term downtrend which started in mid-late 2010.

The Bund market’s strength over recent 2-3 weeks can be put down to the tensions in the Eurozone debt crises. We have seen a fresh deterioration in yields across the board almost on a daily basis, with peripheral yield spreads vs. German bunds broadly trading around Euro lifetime highs. Talk of the Greeks needing to restructure their debt has seen their 10yr yields spike to above the 14.0% mark. This should be supportive of Bunds. We continue to re-iterate that Greek bond restructuring is the long term solution to the issues being faced by Greece. Also, it is likely that the rest of the periphery would then follow suit. The bailout programmes instigated by the EU and IMF as only short-term mitigating solutions which in theory should buy the periphery some time. It is a short-sighted political move. This hasn’t panned out well as a complete loss in market confidence in the debt of these nations’ means that we are steadily moving headlong toward the final conclusion. What has so far kept the EU crisis out of being the major market focus for much of the year have been the risk-on trades being stimulated by USD weakness. However, a turn lower n risk appetite may focus participants’ minds on the reality of the Eurozone.

Bull View

Bulls will need to protect the 122.50 level if they are to build a base for further immediate term bullish action. The market has now built value above the 121.67 level, which should now act as the launch pad for a fresh move higher.

Bear View

Bears will need to protect the 123.20 level. If this is achieved they will need a swift move to back below the 121.25 level in order to signal that the recent move higher was short-term corrective action.

Futex View

We are bearish the German Bund in the medium- long term. The market has settled into a steady rhythm of weekly lower highs and lower lows since making the August 2010 highs. However, the ongoing issues in the Eurozone leave us to believe that a good short-term run higher is likely. We would back a move through the 123.00-20 area. We will need to see how the market trades around here and then the 124.00 handle if this area is breached in order to change our medium term outlook. If the Eurozone debt issues deteriorate further we should see the medium term outlook adjust accordingly.

26th April 2011
Bond Overview

Bond markets have been largely sideways over the last week, consolidating their recent moves higher. The markets’ have remained largely resilient to the moves higher seen in risk markets since the recovery seen in risk appetite heading into the end of last week, thus suggesting that there is a good amount of underlying strength in the bonds at the moment.

Thoughts from the Trading Floor

From a technical perspective, German Bunds have potentially staged a key weekly reversal. The market has recovered form firm support at 3.5%, which coincided with the 119.85-95 area. The market had formed as bullish outside weekly bar, with the break of the 121.25 level signifying a weekly reversal in trend. Since then, the market has formed a base around the 121.67 level, and is trading around the 122.50 handle this morning. The next key level for bunds is the 122.60-74 level. If this is breached, the market targets the highs made in the aftermath of the Japanese earthquake, around the 124.00 handle. A move through here will be required if the market is to turn higher on the medium term weekly timeframe. Until that point, this recent bullish action remains a short-term correction to the medium term downtrend which started in mid-late 2010.

The Bund market’s strength over recent days can be put down to fresh renewal of the tensions in the Eurozone debt crises. We have seen a fresh deterioration in yields across the board almost on a daily basis, with peripheral yield spreads vs. German bunds broadly trading around Euro lifetime highs. There were rumours heading into this weekend that the Greeks may be on the verge of requesting a restructuring of their debt, although this seems a bit too soon. Talk of the Greeks needing to restructure their debt has seen their 10yr yields spike to above the 14.0% mark. Also Spanish yields have stabilised around the 5.5% mark. This should be supportive of Bunds. We believe that the Eurozone crisis is reaching its next logical conclusion culminating in a Spanish bailout and the need for Greece and Ireland to force haircuts on their debt holders. The issue with Greek debt is that the continued loss in confidence in their debt markets has meant that climbing yields forces Greece to pay incrementally more to service their debt. As the bad debt remains in the system, merrily (or not so in this case) being passed on from one participant to another, few participants are prepared to take a haircut on the debt they hold. As yields climb more and more of the money Greece has borrowed to pay for a bailout needs to be passed down to service their debt and the increasing likelihood that they will eventually run out of money playing this game of pass the parcel. Thus it is logical to assume imposing haircuts on their debt holders will be the only way Greece can reach long term stability for their economy. 20th Century history has shown this to be the case.

Bull View

Bulls will need to protect the 121.25 level if they are to build a base for further bullish action. The market has built value above the 121.67 level, which should now act as the launch pad for a fresh move higher.

Bear View

Bears will need to protect the 122.74 level. If this is achieved they will need a swift move to back below the 121.25 level in order to signal that the recent move higher was short-term corrective action.

Futex View

We are bearish the German Bund in the medium- long term. The market has settled into a steady rhythm of weekly lower highs and lower lows since making the August 2010 highs. However, the ongoing issues in the Eurozone leave us to believe that a good short-term run higher is likely. We would back a move through the 122.60-74 area. We will need to see how the market trades around here and then the 124.00 handle if this area is breached in order to change our medium term outlook. If the Eurozone debt issues deteriorate further we should see the medium term outlook adjust accordingly.

19th April 2011
Bond Overview

Bond markets have surged higher over the last week. The Bund has staged a firm come back from the 3.5% yield level and is trading at 3.28% yields this morning. Yesterday saw a notable news event for the markets. The US Govt. had its long term credit ratings put on negative outlook by the Standard and Poor’s rating agency, whilst its long term debt was reaffirmed at AAA. Although perversely, the magnitude of the sell-off in risk eventually saw the USTs recover from their brief sell-off.

Thoughts from the Trading Floor

From a technical perspective, German Bunds have potentially staged a key weekly reversal. The market has recovered form firm support at 3.5%, which coincided with the 119.85-95 area. The market had formed as bullish outside weekly bar, with the break of Friday’s highs around the 121.25 level signifying a weekly reversal in trend. Yesterday saw the Bund trade up to 122.60 high prints in response to the risk aversion trades. The next key level for bunds is the 122.74 level. If this is breached, the market targets the highs made in the aftermath of the Japanese earthquake, around the 124.00 handle. A move through here will be required if the market is to turn higher on the medium term weekly timeframe. Until that point, this recent bullish action remains a short-term correction to the medium term downtrend which started in mid-late 2010.

Yesterday’s announcement by the S&P ratings agency to downgrade their outlook on US debt was a warning shot across the bows of the US to pay attention to their large budget deficit. The recent political wrangling over the deficit reduction plans has been in stark contrast to the single minded austerity plans put into pace in countries such as the UK. The action of the USTs suggests that the market somewhat shrugged off these comments, although USTs did underperform the German Bunds as a result. However, this has left the USTs fairly vulnerable to deep sell-offs should risk appetite begin to recover. Again the short-term correlation between the USTs and the USD will be key. If there is a sell-off in the USD, then we would expect the USTs to sell-off an exaggerated way thus making this correlation between the two markets tighter.

For the Bund market, part of the reason for the recent bullish action has been a fresh renewal of the tensions in the Eurozone debt crises. We have seen a fresh deterioration in yields across the board. Talk of the Greeks needing to restructure their debt has seen their 10yr yields spike to above the 14.0% mark. This has caused nervousness across the board and Spanish yields are now trading above the 5.5% mark. This should be supportive of Bunds. We believe that the Eurozone crisis is reaching its next logical conclusion culminating in a Spanish bailout and the need for Greece and Ireland to force haircuts on their debt holders.

Bull View

Bulls will need to protect the 121.25 level if they are to build a base for further bullish action. After the last 2 days, which has seen a strong bid in Bunds, a degree of pull-back form the 122.65 highs is likely. The onus is now for bulls to build value at these higher levels.

Bear View

Bears will need to protect the 122.74 level. If this is achieved they will need a swift move to back below the 121.25 level in order to signal that the recent move higher was short-term corrective action.

Futex View

We are bearish the German Bund in the medium- long term. The market has settled into a steady rhythm of weekly lower highs and lower lows since making the August 2010 highs. If global economies continue to remain resilient to external shocks, such as the recent issues in Japan and the Middle-East, further tightening of monetary policy will follow swiftly.

12th April 2011
Bond Overview

Bond markets continued to remain under pressure for much of last week, with the June’11 German bund making fresh contract lows this week, moving to the 3.5% yield mark on cash German 10yrs. US 10yrs have also ebbed lower, however have held more resiliently, and are also trading around the 3.5% yield level on cash US 10yr Notes. This is the first time in months that the yield spread between Bunds and US 10yr Notes has been this narrow.

Thoughts from the Trading Floor

From a technical perspective, German Bunds have held resistance around the 120.73-82 level despite a firm attempt to recover through here after the 25bp ECB rate hike and subsequent press conference. The Portuguese bailout request last week has had little effect on the Bond markets of core Europe and the sovereign debt crises seems to have taken a back seat as Spanish yields have tightened since then also. A recovery the 120.73-82 area will be required for Bulls to stage a short-term reversal. Currently support zone around the 3.5% yield level protects the market outlook from turning long term bearish. This coincides with the 119.85-119.95 area. This area is very important as it capped yields in late-2009 at the height of negative bond sentiment before the market moved higher in late 2009-mid 2010. A move through here would signal the start of a long term downtrend and the resumption of the medium term downtrend that the market had settled into since making its August 2010 highs. Since making those highs, the market has settled into a steady rhythm of lower highs and lower lows on the weekly/monthly timeframes.

As we are now heading into a potentially significant turning point in terms of interest rates, Thursday’s ECB meeting was vital for the markets. The 25bp rate hike by the ECB although priced in shows that the ECB is now set on course for a normalisation of policy rates. The relief rally seen in Bunds after the conference was largely due to participants pricing out the immediate threat of an aggressive cycle. However Trichet did little to change the expectations of 1.75% interest rates by the end of the year.

Last week, the Portuguese had to go cap in hand to the EU to request a bailout. Over the course of the last quarter, the Portuguese 10yr yields had moved steadily towards the 9.00% mark. This was clearly an unsustainable situation. However, following the bailout request Spanish yields have tightened to 5.2% as markets again foolishly anticipate that the contagion will not spread. However the continued deterioration in the Eurozone peripheral debt markets can derail the recovery and tightening of rates may turn the markets against the precariously placed Spanish economy. If this were to happen, we would start to see and end-game situation for the Eurozone debt crises as trouble in Spain can derail Core-Europe. We would need to see Spanish yields back through the 5.5% mark before we anticipate markets turn their attention to the debt crises once more.

Bull View

Bulls will need to protect the 119.85-95 area if they are to avoid a further deterioration. If this area goes, the bulls will have a long hard road ahead to turn the market’s tide.

Bear View

Bears will need to capitalise on their recent ascendency by pushing through the 119.85-95 area. A failure to break down to this area may see stale shorts eventually heading for the exit.

Futex View

We are bearish the German Bund in the medium- long term. The market has settled into a steady rhythm of weekly lower highs and lower lows since making the August 2010 highs. If global economies continue to remain resilient to external shocks, such as the recent issues in Japan and the Middle-East, further tightening of monetary policy will follow swiftly.

5th April 2011
Bond Overview

Bond markets continued to remain under pressure for much of last week, with the June’11 German bund making fresh contract lows on Friday as well as the US 10yr Note futures. Since then, the US 10yr has provided a respite and recovered a little form those lows. However, the Bund has remained under-pressure as we head into the ECB policy meeting on Thursday.

Thoughts from the Trading Floor

From a technical perspective, German Bunds have held resistance around the 121.20 level despite repeated attempts to recover through here. The Portuguese sovereign debt downgrade today has seen the market unable to take this level out again, as I write this. A recovery through here would then target the 121.50-60 area. For Bulls to stage a short-term reversal a move through the 121.82-89 area will be required soon. Currently the 120.73-85 support zone protects the market from the 119.85-120.50 area. This area is very important as it capped yields in late-2009 at the height of negative bond sentiment before the market moved higher in late 2009-mid 2010. A move through here would signal the start of a long term downtrend and the resumption of the medium term downtrend that the market had settled into since making its August 2010 highs. Since making those highs, the market has settled into a steady rhythm of lower highs and lower lows on the weekly/monthly timeframes.

As we are now heading into a potentially significant turning point in terms of interest rates, Thursday’s ECB meeting will be vital for the markets. A 25bp rate hike by the ECB is priced in and a given for the markets. With the expectations of 1.75% interest rates by the end of the year, the press conference by Trichet will be vital. If the ECB signal further imminent rate hikes the market will have to dramatically move up its expectations of further tightening by the end of 2011. The next Trichet communiqué may give the market a better idea of whether we are about to enter an aggressive tightening cycle or whether the ECB are happy to move 1 or 2 more times before entering a wait and see stance.

Today saw a single-notch Portuguese sovereign debt downgrade by the Moody’s ratings agency. They moved Portugal’s debt ratings from A3 to Baa1. For the moment, the Bund has been able to somewhat ignore the downgrade as the major focus of attention remains on Thursday’s ECB meeting. However, the continued deterioration in the Eurozone peripheral debt markets can derail the recovery and tightening of rates may be the straw that breaks the camels’ back as far as the peripheral dent end-game is concerned. If the ECB rate hikes strangle any growth in the peripherals, no amount of cuts in public spending will save the peripherals form their current precarious position.

Bull View

Bulls will need to protect the 120.73-85 area if they are to avoid a further deterioration. If this area goes, the last gasp protection for bulls will be the 119.85-120.50 area.

Bear View

Bears will need to capitalise on their recent ascendency by pushing through the 120.73-85 area. A failure to break down to this area may see stale shorts eventually heading for the exit.

Futex View

We are bearish the German Bund in the medium- long term. The market has settled into a steady rhythm of weekly lower highs and lower lows since making the August 2010 highs. If global economies continue to remain resilient to external shocks, such as the recent issues in Japan and the Middle-East, tightening of monetary policy will follow swiftly.

29th March 2011
Bond Overview

Bond markets continued to edge lower last week, tracking the positive sentiment seen in equity markets. The markets were able to shrug off a further deterioration in the Eurozone peripheral debt markets. The Bund is trading around a key support area at the moment, and the choppy trade around here signifies a key tussle. The outcome of the price action around here may then determine the market’s short to medium term direction going forward.

Thoughts from the Trading Floor

From a technical perspective, German Bunds have held resistance around the 122.55 level despite repeated attempts to recover through here. The Portuguese sovereign debt downgrades last week saw the market spike to the 122.74 level before a swift rejection saw the market come under pressure heading into the end of the week. Currently the 121.41-46 support zone protects the market from the 120.92-121.12 area. This area is the June ’11 contract lows and a move through here would signal the continuation of the medium term downtrend that the market had settled into since making its August 2010 highs. Since making those highs, the market has settled into a steady rhythm of lower highs and lower lows on the weekly/monthly timeframes.

As we are now heading into a potentially significant turning point in terms of interest rates, with even the US FOMC members starting to talk hawkish, a refresher of hawks and doves at the three major central banks is presented. As we see a shifting balance between the hawks and doves, knowing which members are turning to which ‘camp’ provides opportunities to affect good trades if a member makes a certain type of comment. For example a well known hawk making a hawkish comment is unlikely to present a good opportunity. Alternatively, a well known dove making hawkish statements provides a significant opportunity.

The Bank of England MPC. Listed in order from most hawkish to most dovish:
1. Sentance, 2. Weale, 3. Dale, 4. Bean, 5. Tucker, 6. Mervin King, 7. Paul Fischer, 8. Miles, 9. Posen.

The European Central Bank. Listed in order of most hawkish members to most dovish members:
1. Weber, Stark, Smaghi. 2. Draghi, Wellink, Lipstok, Trichet. 3. Quaden, Nowotny, Makuch, Gonzalez-Paramo, Tumpel-Gugarell. 4. Costa, Noyer, Hanohan, Orphanides, Kranjec, Liikenen. 5. Ordonez, Provopoulos, Constancio.

US Federal Reserve (FOMC). Members listed with their hawk/dove bias:
Bernake, Yellen, Dudley, Evens and Kocherlakota are Doves.
Warsh, Fischer and Plosser are Hawks.
Duke, Raskin, and Tarullo are Neutral. They are mainly concerned with the regulatory committee.

Bull View

Bulls will need to protect the 121.41-46 area if they are to avoid a further deterioration. If this area goes, the last gasp protection for bulls will be the 120.92-121.12 area.

Bear View

Bears will need to capitalise on their recent ascendency by pushing through the 120.92-121.12 area. A failure to break down to this area may see stale shorts eventually heading for the exit.

Futex View

We are bearish the German Bund in the medium- long term. The market has settled into a steady rhythm of weekly lower highs and lower lows since making the August 2010 highs. If global economies continue to remain resilient to external shocks, such as the recent issues in Japan and the Middle-East, tightening of monetary policy will follow swiftly.

22^nd March 2011

Bond Overview

Bond markets observed continued volatility last week with violent moves generated by both the nuclear crisis in Japan and the continued conflict in Libya. Bonds took a strong offer as Gaddafi declared a cease-fire, which was promptly broken. Traders fully expect news to drive market moves and generate further volatility over the next week.

Thoughts from the Trading Floor

From a technical perspective, German Bunds slowly closed the gap at 122.63/122.19 as the panic bid seen last week cooled and sellers took control. The market squeezed back down below 122.50 and short-term momentum seems to be returning to the bears. However, it is worth noting that the market has been fickle and panic driven and aggressive drives in both directions are a strong possibility. Sellers will be looking at 121.71 support and a potential test of 121.11 if their momentum picks up. On a lighter note buyers will be looking to regain the 122.50 and 123.00 handle and restore some of the aggressive buying seen early last week.

Many economists and analysts are quick to quote that current global fundamental conditions are being hit by ‘multiple black swan events.’ It is still highly difficult to assess the long-term effects and potential likelihood of a rebound from post-earthquake Japan. It appears that the nuclear threat has stabilised but still remains in a dangerous state. There is no quick fix in sight but rather the potential for a drawn out long-term recovery. It is extremely difficult to assess the probability of a swift recovery; the main concern now lies with the rolling blackouts and electricity shortages. Major industrial supply chains have been disrupted both in Japan and with their trading partners across the globe which means the industrial powerhouse needs to get back on the rails before a recovery can take hold. Many economists are currently viewing the situation as a potential slingshot out of recession. The large public and private sector rebuilding projects that will be needed over the coming years will add a massive multiplier effect to economic growth.

Important events this week

• Tuesday: UK CPI, RPI.
• Wednesday: US New Home Sales.
• Thursday: US Durable Goods
• Friday: US GDP

Bull View

Bulls took a strong bid early last week on the back of severe panic in the market; the price action was extremely volatile as prices surged to just below the 124.00 handle. However, higher ground was not held and the market fell back below 122.50. Buyers will need to recapture their old momentum and pressure higher prices. Global fundamentals are still on edge and this should help in their pursuit.

Bear View

Bears, in the face of such bullish fundamentals, have done remarkably well to reject any moves past the 124.00 handle. Helped largely by the continuing stance from the ECB of not changing their new hawkish language, sellers will look to drive out long positions placed rashly in the panic of the last week.

Futex View

We are still bullish on German Bunds. Global problems in Japan and Libya still exist and we do not see them being fixed any time soon.

8^th March 2011

Bond Overview

Bond markets witnessed an aggressive change in language from the ECB, as Trichet used his favourite interest rate hike hint of ‘strong vigilance’. Markets are now anticipating a hike at the next meeting, as the ECB seeks to combat heightening inflation risks. All eyes will be on the BOE’s rate announcement this week. The BOE is for some punters the favourite to be the first central bank to raise rates. If they do, it will no doubt be a big day for bond market traders.

Thoughts from the Trading Floor

From a technical perspective, German Bunds rollover today into the new June 11 front month contract. The new contract is currently trading lower than the previous, just under the 122.00 handle. The market still seems dominated by selling pressure. With contract lows at 120.91, it is highly possible that a test of here will occur over the next week. Bears will be hoping to pop lower and slide the market back to a key psychological yield level of 3.5%. This area is likely to be met by resistance. Bulls will look to keep their heads above the waterline and search to prod the market back towards 123.13, a previous swing high in the medium-term. A move above the 123.00 handle is likely to support a bigger upward retracement and buyers will be aiming for key resistance at 123.13-35, 124.24 and a broader target of 124.97. However, in its current situation the market is still bearish in the medium to long-term, but bulls have done enough to hold current prices for the moment.

Last week ECB’s Trichet completely changed his press conference language, hitting the markets with a bombshell ‘It is essential that the recent rise in inflation does not give rise to broad-based inflationary pressures over the medium-term. Strong vigilance is warranted with a view to containing upside risks to price stability.’ The code word ‘strong vigilance’ signalled the intention to raise rates in the following meeting, in the previous monetary policy tightening cycle. With recent inflation fears there seems to be no reason to think any differently this time around. The ECB are seriously worried about second-round inflation effects due to the rapidly rising commodity markets which could dampen economic growth. The ECB is also drawing a line in the sand and is set to exit all emergency liquidity measures. The BOE rate decision looks set to be a tense moment with a good chance of a hike. Many market participants would then argue the Fed could be starting to fall behind the curve on their own momentary policy.

Important events this week

• Thursday: BOE monetary policy announcement, US Jobless claims

• Friday: US Retail Sales Report

Bull View

Bulls have taken a large blow as interest rates look highly likely to rise in the coming months in Europe. Buyers will now look for a flight to safety from investors to bid the market higher. For this to happen the equity markets would have to deteriorate further and even then it is still not certain that this would offset the new ECB monetary policy changes.

Bear View

Bears have capitalised on the extremely hawkish ECB press conference. The market is already trading lower in the new June contract. Sellers will look to push this recent ECB change in monetary policy and look to target the 120.00 handle as yields rise.

Futex View

We are still bullish on German Bunds. However, we are torn fundamentally as a result of changes in ECB monetary policy on the one hand, and the potential flight to safety as equity markets drop and global investors seek ‘risk-off’ trades on the other.

22^nd February 2011

Bond Overview

Bonds have achieved a positive week. This is the first noteworthy gain in German 10 year Bunds since the start of the year. The global fundamental picture is still causing large concern, as political stability in the Middle East seems to be disintegrating, which is slowly filtering into the markets.

Thoughts from the Trading Floor

From a technical perspective, German Bunds have resurged out of their slump, under a fresh wave of buying. The market bounce off 122.29 lows, back to above the 123.00 handle. Buyers should be encouraged by recent progress, momentum indicators have ascended into higher ground. This should indicate further upside gains over the next few days; buyers will be targeting 124.36 and 124.53 levels. If these levels are cleared with ease the 125 handle is likely to be challenged. On a more negative tone, the medium to long-term trend is still bearish. It is unlikely that sellers will not give in without a fight. To maintain a negative bias for the next week 123.76 is an important daily swing low which buyers will have to be defended.

Portuguese bonds have seen a difficult week, with once again speculation of a EU bailout rearing its head. As well as this we have seen further indecisiveness amongst policymakers over a long term solution to the debt crisis. Wednesday’s Portuguese’s auctions did produce some interesting results as investors paid 3.99% for a 1 year auction. This catches the attention to us as trader as it is a lot less then yields paid in November and December. However this may be down to the fact that the ECB brought a large sum of Portuguese bonds early last week and investors are simply following on their coattails. This could signal a more positive note that investors are happier to gamble that a restructuring of Portuguese debt is a lot less likely to happen, with a 4% yield to good a chance to miss.

Important events this week.

• Tuesday: Consumer Confidence (US)

• Wednesday: BOE Minutes, Existing Home Sales (US)

• Thursday: Durable Goods Orders (US), New Home Sales (US)

• Friday: GDP (P) (UK)

Bull View

Bulls have finally regained their vigour and put in a significant gain over the past week. However their gains are small in comparison to the larger picture. To make a meaningful impacted in the market buyers should look to take and hold the 125.00 handle, as a building block for a larger up swing.

Bear View

Bears have slowly lost their tight grip on the market and have let a fresh buying wave commence. To stop a significant bounce sellers should cap the market below 124.36, but this may prove to be a challenge as the tide as turned against them.

Futex View

We have taken a natural stance on German Bunds, for weeks the market has slowly ground lower. We believe a considerable retracement is overdue, but we are still bearish in the medium to long term and will bide our time before selling again.

15th February 2011
Bond Overview

Bonds tracked sideways last week in a rather lacklustre fashion. The market was largely trapped between 123.29 and 122.30. Volume was below average, but with a busy economic calendar this week, volatility is likely to pick up.

Thoughts from the Trading Floor

From a technical perspective, German Bunds have consolidated within a tight range over the past few trading days. Downward momentum has ground to a halt, yet upside pressure has failed to break 123.17. Bulls seem eager to re-enter the market but have bided their time; first signs of an upward drive will come from a breach of 123.17. If such a scenario plays out, upside targets for this week can be found at 123.76, 124.36 and 125.05. It is important to remember that the trend is still pointing to lower ground and a downside break is still on the cards with the 3.5% Bund yield still a target in many traders’ minds.

There is a raft of economic data out this week and traders will be focusing on a variety of numbers and themes. UK CPI will be closely watched as there is much speculation of higher numbers adding to the insecurity of the UK’s stance on tackling its ever-growing inflation problem. FOMC minutes will also be released this week. Even though they are expected to be a non-event, traders will be on the trigger if there is a change in rhetoric and a hint of sooner-than-expected inflation or changes to QE2.

EU peripheral debt yields took a sudden rally again last week, with Portuguese yields rallying to all time highs of over 7.55%. It is highly likely that that the EU debt crisis will create more instability in bond markets. Any talk of a Portuguese bailout seems to be already priced into the system; it appears to be only a matter of when, not if. But traders will be watching Spanish yields - currently 5.46% in the 10 year - to see if Spain will be caught in the contagion net. This would leave the ECB in dire straits, as there would be an immediate need to increase the bailout pot.

Important events this week
• Tuesday: CPI (UK), ZEW Survey (Ger), Advance Retail Sales (US)
• Wednesday: FOMC Minutes
• Thursday: CPI (US), Phili Fed
• Friday: Retail Sales (UK)

Bull View

Bulls have not been victorious in winning back any ground but have consolidated the market into a tight range. Buyers will be hoping for a long overdue retracement, back above 125.00.

Bear View

Bears have slowed their advance and have almost come to a stop. Even though they have not given up any ground of yet, they will need to put in a big effort to reach the 3.5% yield over the next week.

Futex View

We are still bearish on the bond market with yields continuing to rise across bonds. However, we will be very wary this week of EU peripheral debt instability and a possible flight back into the safety of German Bunds.