Wednesday, June 17, 2009

Government bond yields are falling again

As suggested what might happen (see for example Have we seen the highs in UST and Bund yields?), government bond yields have started to fall with 10y Bunds some 25bp below recent highs and 10y UST some 30bp. I regard this as a significant development. For one, in both cases this constitutes the largest fall since mid March when yields fell approx. 50bp for 10y UST and roughly 30bp in 10y Bunds in the wake of the FOMC announcement to start purchasing longer-term US Treasuries on March 18. This time, however, there is much less of such artificial help for government bonds (albeit there is talk the FOMC could become more explicit at its next meeting about keeping the funds rate low for some time). Again, I think the technical picture looks good (as the chart shows, the 50% fibonacci retracement has held in the case of 10y Bunds at 3.774%) and the market has turned bullish from oversold conditions.
Positioning as well remains tilted in favour of shorts according to CFTC in the case of US bond futures. Fundamentally, the longer term outlook remains challenging for the global economy and by now it seems that economic data releases are not tilted in favour of positive surprises anymore with some releases coming in below expectations and some above. Additionally, the rating downgrade cycle in the credit space is continuing unabated while defaults continue to rise. Therefore, the stage has been set for risk appetite to wane again. Finally, supply turns market supportive at least in the Eurozone with gross supply of government bonds becoming significantly lower from next week onwards. Overall, technicals, positioning, the medium-term fundamental outlook as well as shorter-term risk appetite are finally working in favour of govies again. Therefore, the outlook for the safe-haven of government bonds in the form of US Treasuries, Bunds as well as the USD has been brightening and setbacks should be used to add to longs. On the other side, risky assets are breaking through their recent upward trends highlighting an increasing probability of a deeper and longer-lasting bear-move.


  1. I concur. We will be seeing lower yields again, possibly, as you imply, at the expense of the credit spreads, who may not follow the yield move down one to one.

  2. Yes, credit spreads are likely to widen and lag the performance in Bunds/USTs. However, I would assume that the likely widening in spreads will not be of such an indiscriminate nature (and not as pronounced by far) as following the Lehman collapse which saw spreads of any credit product blow out sharply. I would rather assume that we see an increased discrimination between industry segments, depending on the overcapacity in a given industry/the outlook for demand etc. So my guess would be that for example utilities hold in much better than lets say autos...(whereas both widened sharply during autumn).