The long Bull Run in bonds that tracked the financial crisis/recession increasingly looks over. Earlier this year when growth started to return to the developed economies, Government Bond markets remained well supported, but not now. Why is that?

The Technical Trader’s view:


The US Treasuries has fallen hard from close to their Pivotal Prior Highs at 128-22, through the first supports of significance at 121-21.5 and 122-14.5.

This is a significant breakdown, and should not be underestimated.

But the lack of a compelling Reversal pattern or Top formation robs the bears of short-term momentum.


So too, has there been a vicious pull-back in the Bunds from the massive resistance of a cluster of Fibonacci levels.

But note that in this case the market’s steep decline has yet to break the vital band of support 124.60-126.53.

The diagonal from 2008 is an added bear factor, but that band needs to be broken for the bears to really triumph.

Nor indeed, like the TNote, is there a top formation in place yet in either the medium or short-term…

These bond markets have come far and fast, the source of the next bear impetus is as yet unclear.

The Macro Trader’s view:

The long bull run in bonds that tracked the financial crisis/recession increasingly looks over. Earlier this year, when growth started to return to the developed economies, Government bond markets remained well-supported. Not now.

When the Euro zone sovereign debt crisis broke in the spring, bonds rallied anew as traders rushed into US Treasuries, UK Gilts and Euro bunds; traditional safe-haven trades. But now they are all under pressure despite the Euro zone debt crisis gripping markets again, forcing Ireland to seek an EU/IMF/EZ/UK rescue, and other peripheral Euro zone Countries seeing their bond yields hit new highs.

Basically traders fear the fiscal stance of many Euro zone Countries are unsustainable. They are also becoming anxious about Germany’s ability to underwrite too many more rescues. In fact, the German Government is anxious too. Chancellor Merkel does not want to increase the rescue fund. The Chancellor would also like more of the burden of future rescues to fall on private investors in Eurozone government bonds; this too has unsettled bond markets with the once safe Bund looking vulnerable to further selling.

Then there is the US fiscal position. President Obama has run up enormous debts, but unlike most Euro zone Countries that have implemented austerity budgets, he believes the US can go on writing IOU’s forever.

In the UK the Government has implemented drastic spending cuts, and so far the economy is holding up well. Some think once the cuts bite growth will slow, others think the Bank of England should be hiking rates to control inflation which has remained persistently above target for an extended period. The Gilt draws no benefit from the spending cuts and also looks vulnerable to further selling.

But recent bearish price action has its roots in the US. Politicians have been arguing about whether or not the Bush era tax cuts that are about to expire, should be renewed/extended to help support the economy. President Obama had opposed this. He argued they were too focused on the middle classes and did little to help the poor.

But suddenly he changed his mind this week and agreed to extend them, subject to votes in both houses of Congress. However there are some powerful critics of this U turn on both sides of the political divide.

The Bond markets took fright. If agreed, these tax cuts would add about US$1.0T to the national debt in just 2 years and keep the budget deficit to GDP ratio at around 10%. This is clearly unsustainable and Moody’s has again questioned the US’s ability to hold onto her AAA credit rating in such an environment.

Traders fear such a move, which together with the Feds current QE2 policy would prove inflationary as it amounts to a 2nd fiscal stimulus the US can hardly afford.

We judge the environment is turning increasingly bearish for Bonds and a vote in Congress in favour of extending the tax cuts without off setting spending cuts, would likely provide the short-term trigger the Bears seek.

Mark Sturdy

John Lewis

Seven Days Ahead

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