30th March Bond Futures
Overview
Over the last 5 trading sessions we have seen the bund move sharply lower touching a recent low of 122.53 last Thursday. This move appears to have been led by the US Ten Year which came under pressure on the back of three poor auctions.
Thoughts from the trading floor
From a technical perspective we have seen a significant shift in the Bund over the last week. The failure to complete the contract gap close has seen the market quickly lose ground and it now appears to be forming a potential bear flag. Yesterday it tested the 50% retracement of the recent down move (123.13) but quickly lost ground. As long as the Bund holds below here a bear flag formation remains technically sound. A break of 122.54 would confirm the downside momentum and would most likely see a challenge of the June contract low at 122.07. The US Ten Year has also shifted dramatically to the bearish side. Since the June contract became the front month the market has been under extreme pressure taking out key support at 116.285. Like the Bund we may see the development of a daily bear flag over the next few days. If this proved to be the case a downside break would be tested by support at 114.285 and 114.080.
This week we will see the latest jobs data released out of the US. It is expected to show the strongest results for over two years, an outcome that may see some fixed income bulls grow nervous. The figure is expected around +190k but if, hypothetically, we were to see a print above 300k it may lead some participants to be concerned over the timing of Fed’s interest rate hikes. There would likely be pricing in of a change in language at the next FOMC meeting, away from the extended period terminology to something more hawkish. For this reason it is likely that fixed income will remain under pressure this week as fears of a stellar NFP paralyse bulls.
Last week the US had three treasury auctions all of which were met with poor demand resulting in higher yields. On both the 5 and 7 year the US Ten Year dropped over half a point, and at the time this seemed extreme. In retrospect this highlights the concerns that still remain regarding the US’s ability to pay for its extreme levels of spending. Auctions will be under particular scrutiny over the next few weeks as traders look for signs of further weakness.
Important events this week.
- Tuesday: GDP UK (final), Consumer Confidence (US)
- Wednesday: ADP Employment Change (US) , Chicago Manager Survey
- Thursday: Initial Jobless Claims, ISM Manufacturing US
- Friday: Change in Nonfarm Payrolls US
Bull View
Bulls will be disappointed by the recent failure to achieve the contract gap close in the Bund, although this will remain their short term goal. Last week’s downgrade of Portugal by Fitch will have given them hope that further instability in peripheral European Nations will re-invigorate the flight to quality trade.
Bear View
Bears had a good last week and will be looking to capitalise on their success by breaking the potential bear flags in both the US Ten Year and the Bund. A strong payrolls number on Friday will be a big boost for them as it will heighten fears of earlier than expected rate hikes.
Futex View
We believe the Bund and US Ten Year will remain under pressure this week in light of the strong expectation for payrolls released on Friday. However beyond this week we expect fixed income to remain fairly resilient, comforted by historical data that shows the Fed has never entered into a rate hike cycle while unemployment has been above 7%.
