15th December Bond Futures overview
15th December 2009
Bond Futures
Overview
Over the last five days we have seen the Bond futures pull back from last week’s highs as fears over a potential government debt crises subside for the moment. This has been in-line with equity markets which have recovered strongly from their respective lows.
Thoughts from the trading floor
The last week has seen the March ’10 Bund future form a short-term “double top” around 123.72-76, which has resulted in a small break down to the 123.00 handle. Since then it has traded predominately between 122.58-62 support and 123.06-12 resistance, with choppy trade seen between these levels. Whereas, USTs have been on a steady downward trajectory since last week, after making 120.150 highs, and now looks to challenge the 117.000 handle. The market has a bearish short-term corrective bias below the important 118.140 level, and barring any further risk aversion events, looks set to challenge the 116.100 level.
We have started to see a disconnect between the Bund and the T-Note in the last week. USTs have entered a good short-term corrective trend and look weak in the immediate term, whereas the Bund seems to be well supported by the 122.58-62 level. There may be strong fundamental factors behind this reason. Uncertainty surrounding the fiscal situation in the Euro-Zone area (Greece, Ireland and Spain in particular), has led to a general flight away from these bond markets into the safe haven of the German Bund- thus supporting the market. Whereas USTs have mirrored moves in equity markets more closely, and have been on a steady downtrend as equity markets look to recover most of the sell-off seen last week. Also, weaker than expected US 10yr and 30yr auctions have added to the bearish pressure. This may be due to market participants reluctant to bid ahead of tomorrow’s FOMC policy announcement, as a recent pick-up in economic data may push the Fed into unwinding some of their support for the long end of the treasury market through the withdrawal of some of their monetary policy tools.
Bull View
Bulls will hope that the recent jitters in the markets persist into next year. With the USD recovering a good part of its losses seen during the early parts of this quarter, the prospect of a broad based sell-off in risk trades early next year should be supportive of the bond market. They will see this correction in USTs as a good buying opportunity. For the Bunds, the strong support at 122.58-62 provides a natural stop for longs placed ahead of this level.
Bear View
Bears will hope that USTs continue on their short-term corrective trend to the 116.000 handle. They will cite a pick-up in recent macro-economic data (mainly the US Employment situation number) as a reason for the FOMC to gradually withdraw stimulus from the markets, helping USTs lower. Bund bears will hope that recent jitters over Euro-Zone fiscal problems subside allowing the Bund to play catch-up with the USTs.
Futex View
We continue to back the Bulls. The recent correction in USTs may prove to shake out weak longs before the market resumes its medium term up-trend. The fiscal positions of many governments globally have the potential to develop into a full-blown crisis early next year and thus Bunds and USTs should provide a natural safe haven (on the proviso that the reserve status of the USD and USTs outweigh fears over the US’s own large fiscal deficit).
