10 year Bunds under pressure

Over the last five days both Bunds and US Ten Years have come under pressure on the back of a rebound in equities. The catalyst for this move was some surprisingly strong data out of the manufacturing sector followed by a good payrolls number. This week there is little to get excited about except the latest rate decision from the BOE.
From a technical perspective the Bund shorter term outlook has become more balanced following the aggressive sell-off last week. The Sept. contract reached lows of 131.73 before achieving a slight rebound yesterday. This low perfectly matches the target of the small daily double top formation formed the previous week an indication that the concerted selling could be over for the time being. It is also worth noting that from today volume has switched to the Dec. contract providing a large contract gap. In recent times we have seen these closed within the first few weeks of the new contract, if this is to be achieved again the target price is 131.73 (Dec.).

Last week the macro releases proved culminating in some strong jobs data out of the US on Friday. The US payrolls numbers showed that only 54K jobs were lost compared to expectations of -90K. The Private Payrolls number also surprised to the upside coming in at 67K against expectations of a 40K print. Although these number were not exceptional Bunds and US Ten Years found themselves under pressure. We doubt that these recent strong figure will spell an end to a deterioration jobs market in the US and we expect further weakness to occur throughout the rest of 2010.


This morning the WSJ printed an article which stated that recent disclosures by European banks showed they did not provide a comprehensive disclosure of government debt holdings during the European stress tests. This revelation resulted in a strong rally in the Bund as spreads against European peripherals widened. This story will likely develop during the week and gather further interest.

Euribor curve continues to flatten

The Euribor curve continues its flattening as European economic woes continue, recent comments out of Hungary stating that they are at risk of default further put pressure on the Euro and put a bid to the bond markets. Euribor spreads have been narrowing as the back end has been bought up and the front end has been sold off as Libor rates continue to rise as a result front month spreads are edging closer to zero.
June Schatz traded above 110 and Bunds were in touching distance of the 130 level, which mathematically seems to make no sense, but investors are pouring in into safer government assets as risk appetite is dwindling.
Looking forward, it seems that the fear of spiralling debt levels will continue to keep this market on edge. We likely to see continued volatility to day to day changes in news and country situations, as well as continuing changes in debt ratings for European countries.
I continue to only keep intra day positions and be flat over night as overnight risk remains high.

Bond analysis

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.

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.

Short Sterling technicals

June10 has resistance at 99.28 if we move above 99.26. Below support at 99.23 sees buyers entering at the lower
end of the range at 99.21/20.

Sept10 struggling at 99.10. Once through 99.11 we can look for the contract highs of 99.15. Good support remains
at 99.06/05 but a break lower is possible and would target 99.025/02 for a buying opportunity.

Dec10 broke lower to hit our support at 98.76. A break of 98.75 is now possible and would take us to 98.725/72.
Expect a bounce from here to take us to 98.80 initially. If 98.76 holds we could bounce to 98.80 followed by
98.83/84. In the longer term this market now looks weakened so a bounce could be a selling opportunity.

March11 plunged to our support at 98.41. In the longer term this market is looking weaker but for today there is
good support down to 98.40. A bounce from here would target 98.45 then 98.47/48. A break below 98.38/37 is
a worry and should take us to 98.33/32 and could stretch to 98.29/28.

Greece announces Austerity measures

The Euro has been catching a bid on the back of news on reuters:
• RTRS-GREEK CABINET DECIDED ON EXTRA AUSTERITY MEASURES OF 4.8 BLN EUROS- GOVT SOURCE 09:00GMT
• RTRS-GREEK CABINET DECIDED TO RAISE VAT TAX BY 2 PCT POINTS TO 21 PCT- SOURCE
• RTRS-GREEK CABINET DECIDED TO TRIM SALARY BONUSES BY 30 PCT IN 2010- SOURCE
• RTRS-GREEK CABINET DECIDED TO FREEZE STATE PENSIONS IN 2010- SOURCE

Poor consumer confidence rattles market

Poor consumer confidence from the US coupled with lower then expected Business Confidence from Germany , lifted bonds across the curve and smashed the Euro in the process.
Bunds are now trading back at the 124 level, where as the Schatz is trading at its all time high, yielding below 1%, which is below the current rate.
Euribor and Short sterling yield curves are flattening further pretty much on a daily basis, as continuing worries over the global economy raises doubts that any tightening will occur any time soon.
Spreads along the curve continue to fall, as there is also chatter that we could actually get a rate cut from the ECB, which seems far fetched but never rule anything out.
The latest data add to the recent run of bad news. With German Ifo business sentiment falling in February and French consumer spending dropping in January, there is little hope that the euro-zone recovery will be renewed this quarter.

In the US the stagnation in core consumer prices over the past few months demonstrates that it is too soon to dismiss the threat of deflation. With the unemployment rate still close to 10% there is an awful lot of spare capacity and unit labour costs are in freefall. Money and credit have started to contract. All the evidence therefore points to a further decline in the annual rate of core inflation, probably to below 1% by the end of this year. Under those circumstances, it would be very surprised to see the Fed start to tighten monetary policy.

Stock rise despite discount rate hike

Last week equities performed strongly shrugging off the discount rate hike by the Fed. The S&P 500 future climbed as high as 1111.00 before closing at 1106.25 on Friday. This week may prove slightly trickier for bulls as China re-enters the fold after a weeklong national holiday and some important consumer based data is released in the US.

From a technical perspective the S&P 500 future looks in much better shape that it did a week ago. On both Thursday and Friday last week the market closed above the technically significant level at 1103.25 pushing the chances of a further break higher this week. Further resistance lies to the upside around 1113.00 and beyond that at 1127.00, a breach of here would signal the market is ready to retest the 2010 highs at 1148.00. If the market was to fail around its current level and break back below 1103.25 it would be in danger of falling back down to the previously held daily uptrend at 1068.50. If the market was to break this uptrend a break of 2010 lows would almost certainly follow making a serious move lower likely.

Last week the markets overcame a large test when the Fed raised the discount rate and the markets continued to rally after some initial jitters. This has to be taken as a bullish sign although it would be easy to read a little too much into the market’s reaction. We believe the true test will come when the Fed changes its language in particular the removal of the phrase, “rates will remain exceptionally low for an extended period”. Until then the markets, particularly the equities, will trade safe in the knowledge of loose monetary conditions.

It is worth noting that last week’s equity rally was on the back of relatively light volume and several analysts have pointed to the European and US Indices Options expiry on Friday as a possible cause for the bullishness. We believe this may have been a contributing factor and that this week’s trade will tell us to what extent but with Consumer Confidence, GDP and Durable Goods orders all out this week we could see a real test of the current rally.