Debt ratings downgrade threat hits Bonds

Over the past week we have seen a big drop in Bunds, Gilts and US 10 year as the threat of a possible downgrade to government debt gets investors scrambling out govies.
Bunds have dropped below the 120 level and is trading at 119.76 as we speak. Looking at the chart below, technically speaking we could be due a bounce as we are touching the bottonm of a downward channel, but a break below this could mean a test of 118.


On the short end of the curve, Euribor and Short Sterling spreads have continued upwards. As longer dated yields continue to be sold of relative to the front end. We are trading above 30s on the Sep10-Dec10 spread, and on the short sterling front, we are trading 44s on the sep10-dec10 spread. In terms of trading, I will maintain an emphasis on going long on pullbacks, but am trading smaller size as there is still quite a risk that there will be a big pullback in these spreads soon as they have come up too far in my opinion.
Stock wise we look to be consolidating around these levels. The fact we have hit 8500 in the Dow twice and not gone further suggests, downside is more likely. We shall see what happens...