Bund analysis

From a technical perspective the Bund continues to trade sideways trapped between strong resistance at 123.00 and support at 120.00. Messy trade has continued over the last five days and at current there appears no bias in either direction. The US Ten Year continued to outperform the Bund as it reached highs of 119.230 last night. The high of the previous double top formation at 119.290 appears to be under threat and a test of this level later this week looks likely. If this resistance were to break, further levels to the upside can be found at 120.180 and 121.095.
Last night Bernanke highlighted his concerns over a weak labour and slow recovery and in doing so signalled that current exceptionally low rates were here to stay for the foreseeable future. This was taken as very bullish news by the treasury markets as concerns were eased over the timing of the Fed’s exit from monetary stimulus. With this now in traders’ thoughts we would expect to see a flattening of the yield curve over the next few days as the longer end attracts more attention.
The only fly in the ointment of the Fed’s plans for an extended period of low rates could come from a surprise rise in inflation data. This week we will see the release of US PPI and CPI. Both of these are seen as backward looking so a figure above analysts expectations may be send jitters through the fixed income markets as this could interrupt the Feds plans. We do not expect these to surprise to the upside but they must be considered the best indicators when predicting the timing of the Feds removal of its low rate policy.