30y US TBond yield finally broke through 4.10-4.20% support area
In the Eurozone, 10y Bund futures have followed the 30y US lead and made a new high earlier this morning at 121.91, breaking above the double-top reached on September 2 (121.73) and September 11 (121.74), thereby as well providing a positive technical signal.
Bund future breaks through double-top formed in early September
Finally, this bullish momentum should be accompanied by flatter yield curves, i.e. it will be the long areas of the curve which drive the bond market and not the short-term parts. Usually, yield curves bull-steepen and bear-flatten. This is because short-end yields are more volatile than their longer-term counterparts given that in a normal environment central banks conduct monetary policy via changes in short-term rates and because short-term expectations are more volatile than long-term expectations incorporated into long maturity bonds. However, short-end rates cannot fall much further, leaving only limited performance potential for short-term bonds. Furthermore, central banks have been engaging in non-standard monetary policy action (i.e. QE and credit easing). The Japanese experience has shown that in such an environment of very low short-end yields, it becomes the long-end which is driving the yield curve as the volatility in short-end yields drops once they approach the 0% lower nominal bound. As the chart below suggests, the 1% level in 2y benchmark bonds seems to be where this fundamental shift in the behaviour of the yield curve takes place.
Japan: fundamental shift in the yield curve behaviour around 1% in 2y yields
Yield curves are likely bull-flattening from their extremely steep levels
Overall, the fundamental outlook for US and Eurozone government bonds remains supportive amid a prolonged period of low nominal growth with inflation pressures weakening further and the current real growth improvement unlikely to be self-sustaining. Technically, the US 30y TBond is sending a strongly bullish signal and also the Bund future is providing an optimistic picture. With a structural shift in the behaviour of the yield curve, we should look for a bull-flattening of the government bond yield curves in the weeks ahead. Stay long!