27th October 2009 Bond Futures
Bond Futures
Overview
Over the last five days we have seen the Bund give up more ground, dropping as low as 120.50 yesterday. An even more aggressive down move was recorded in the US Ten Year; yesterday the yield breached 3.5% as fears surrounding large supply this week resulted in an ongoing sell off in the face of equity weakness.
Thoughts from the trading floor
The daily double tops in the Bund and the US Ten Year continue to prove significant as both markets have continued to drift lower. To the downside in the Bund large daily support exists at 120.00, market behaviour around this level may prove pivotal in deducing whether the Bund is ready to push further and test the yearly lows at 117.52. The US Ten Year also looks ready to drift lower and if it does daily support at 116.190 represents the equivalent pivotal level. As in the Bund the daily double top target is the yearly lows at 114.080.
The downward pressure on US Ten Years yesterday was primarily attributed to the large supply hitting the curve this week. The federal government will sell a total of $123 billion in Treasury notes and TIPS this week, which represents a record. The talk amongst traders is whether the Fed’s decision to step away from treasury purchase scheme will bring supply fears back to the forefront of the markets consciousness. These supply fears may place a greater emphasis on the level of demand in the auctions this week.
This week we will see month end extensions in the worlds bond markets as bond fund mangers look to rebalance their portfolios to take into account new supply and old issues shortening maturity. Last month extensions were large which resulted in a lot of the buying linked to extensions taking place way before the 16.15GMT close on the last day of the month. This months extension’s are slightly smaller (0.09 years in Europe and 0.06 in the US) but still significant, so expect to see some buying pressure come into the US Ten Year an Bund on Thursday and Friday.
Important events this week.
Tuesday: Consumer Confidence US, 2 Yr Auction US
- Wednesday: Durable Goods Orders, New Home Sales US, 5 Yr Auction US
- Thursday: GDP Annualised US, 7 Yr Auction US
- Friday: Personal Income, Chicago PMI, Michigan Confidence US
Bull View
Bulls will be keen to keep the Bund and US Ten Year above the “pivotal” levels of 120.00 and 114.080 respectively. If this can be achieved they can regroup and retest the daily double top levels although they may need some macro deterioration to aid this move.
Bear View
Bears will be very keen to see equities continue their rally and will be hoping that supply fears continue to dominate the thoughts of fixed income traders. If this plays out we could see fresh yearly lows in the next two months.
Futex View
We believe that the bonds will hold above their pivotal levels in the short run and we expect that a retest of the double top will occur before the yearly lows are tested. This does of course depend on some weak macro data over the next few weeks.
