26th January Bond Futures Outlook
26th January 2010
Bond Futures
Overview
Over the last five days we have seen government bonds edge higher as equity weakness has developed. Last Friday German Bunds achieved 2010 highs at 123.49, US Ten Years also performed strongly reaching 118.015.
Thoughts from the trading floor
The Bund and US Ten Year remain technically bullish but will find themselves running into some large daily resistance levels over the next week. To the upside in the Bund resistance lies at 123.53 and beyond that at 124.06, a break of here may act as a pivotal point and will represent the Bund leaving its previous consolidation zone and would get some traders excited about a re-test of 2009 highs at 126.53. The US Ten Year is about to close its contract gap left over form the December roll, this is a price that often provides a strong target/level and it is at 118.085. Beyond here resistance lies at 119.195 and 120.115.
Over the last month the German / Greek government bond divergence spread trade has been the hot ticket. Hedge funds have been buying German debt in the cash market and selling the under pressure Greek bonds. The opportunity now appears to be on the other side of the trade as hedge funds looks to lighten their positions as signs of an improving situation in Greece emerge. This profit taking should have a depressing effect on Bunds and could in turn lead to a widening of the US/German spread. Although this may be a short term phenomena, limited to the next couple of weeks it is worth considering as a trading opportunity.
This Wednesday we will see the latest FOMC interest rate decision; rates will almost certainly remain unchanged but traders will be sensitive to the accompanying statement. The most likely potentially market moving statements would relate to the implementation of reverse REPO operations aimed at draining excess liquidity and the removal of any of the ”special measures”. These would undoubtedly be bearish for fixed income markets although it would not be an enormous shock.
Bull View
Bulls will be aware of the upcoming resistance levels and may well expect a pause before further significant gains are posted. A consolidation around current levels this week would not be seen as a disaster.
Bear View
Bears need to make use of the contract gap close in the US Ten Year at 118.085 to stage a reversal. They will be concerned that a move much higher may result in a break above previous consolidation zones.
Futex View
We believe the Bund and US Ten Year will remain strong in the medium term and will trade higher than current prices. This week we may see attempts to push higher but going may be slow as daily resistance levels stand in the way.
