Monday, October 5, 2009

Rates Strategy Update: Still long

The 30y US TBond has provided a good leading signal for the government bonds universe as I suggested a week ago (see: Rates Strategy Update: Here comes the bull flattener). Following the break of the 4.10-4.20% support area Friday a week ago, the 10y Bund future traded to a new high last Monday and the 10y US TNote yield finally could break through the 4.304% double bottom reached on July 10 and September 2 (see chart below). So, technically, the bond-bull market looks healthy.

10y TNote yield finally breks through strong support at 3.304%Source: Bloomberg, ResearchAhead

In terms of positioning, the CFTC data relating to the US futures markets suggest that non-commercial accounts have reduced their short positions slightly compared to end August. however, they remain net short, even though only moderatly so. Furthermore, they still hold a curve steepening position with longs in the 2y and 5y futures offset by shorts in the 10y and 30y futures. In turn, also positioning does not seem to stand in the way of further price gains.
Most importantly, fundamentals do suggest that further falls in government bond yields are in store for the next few weeks. For one, inflation continues to surprise on the downside as evidenced for example by the German September CPI release where the EU harmonised measure fell by 0.4% yoy vs. expectations of a 0.2% drop and following -0.1% in August. Key, however, is the renewed weakness in economic data releases. Just on Friday I wrote in Autumn growth weakness finally becoming apparent that the recent economic data releases do support the picture of a less-pronounced-than-usual economic rebound into autum and I believe we should look for further negative surprises from September and October seasonally adjusted economic data. This should dampen the optimistic growth outlook which has become consensus over the past months.
Therefore, technicals as well as fundamentals should become increasingly supportive of further gains in government bond prices over the next few weeks and positioning does not seem to stand in its way. In the ultra-short-term, i.e. over the next few days, the picture is less clear as following the recent gains bond futures look short-term a bit overbought and additionally there are not many data releases scheduled for this week. In turn, we might consolidate first before taking another leg higher. However, I would regard this as a very short-term risk and would not expect a meaningful retracement in bond prices. In light of all this, it should not come as a surprise that I stick with my long duration positions on a tactical as well as strategic time scale. Furthermore, I still look for the long-end to be the driver of the market and therefore, the short-end to lag in terms of performance.


  1. Dear Daniel!

    What is your forecast for the 10y yields for Bunds & US Treasuries for the end of the Q4 2009?

    best regards


  2. Hi,
    timing wise i think we should trade with a bullish spin for the next few weeks. However, I expect that the problems with the seasonal adjustments I refered to in the "Autumn growth weakness is finally becoming apparent" article will remain with us for longer (stronger-than-expected seasonally adjusted data in summer, weaker in autumn, stronger in winter). This would argue for a renewed yield rise in year-end. So my guess is we are gonna trade down to a 2handle into November and then move back up towards the 3.25% area again into winter.
    Hope this helps.