1^st December 2009

Bond Futures

Overview

In the light of the negative news out of Dubai and continuing sentiment the Bund has rallied significantly over the last five days. On Friday when the panic surrounding Dubai peaked, the bund hit highs of 124.06, a price not seen since April 2^nd. The US Ten Year mimicked the action of the Bund; highs of 121.215 represented a price not seen since mid May.

Thoughts from the trading floor

Last week the Bund broke some very important daily resistance levels; firstly the previous daily double top at 123.12 before taking out and closing above a daily level at 123.47. After such a strong run up in the last few days, if the Bund holds onto ground above 123.12 we would argue it remains bullish, a failure would signal a false break and could result in a strong reversal. The US Ten Year continued to outperform the Bund as it broke the daily double top level and accelerated almost another 2 points. In doing this it broke support at 120.165 and 121.110. Like the Bund it needs to hold above these resistance turned support levels to remain bullish.

On the back of the Dubai debt concerns last week and the news yesterday that the Dubai Government will not guarantee Dubai World’s debt (thought to be somewhere around the $26 billion mark) the question is what are the tail risks for the wider economy? The problem that Dubai World may face is not that different from what the banks have recently “dealt with”. If they need to sell or shift assets they will have to set a price and due to their assets illiquid nature in the current climate (mainly real estate) this price will be very low. At the moment the markets appear satisfied that the recent restructuring of debt will suffice, but if this proves inadequate a fire sale scenario may follow which would have far reaching consequences.

Since mid November we have seen the yield curve in Germany flatten. We believe that this trend will continue as the world macro picture deteriorates. Assuming the Dubai situation acts as a catalyst for an unwinding of risk trades we could see this trend accelerate as inflation risks deteriorate and fears of a Japan situation increase.

Bull View

Bulls will be keen for the Bund to consolidate above the broken level which was previously the daily double top (123.12). A continuation of concerns surrounding Dubai or a bad jobs report on Friday could push the Bund back towards recent highs.

Bear View

Bears will be desperate for both the Bund and US Ten Year to recapture ground below recently broken resistance. If this is achieved the recent fast rise in bond prices may begin to look like an exhaustion rally and we may see a decent pull back.

Futex View

We believe that the recent run up in Bund and US Ten Year prices is sustainable but before any more significant gains are achieved we may see some consolidation and a retest of broken resistance.

Tags: Bund, Dubai, USTs, yield curve

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