Fixed Income Markets, Technicals

Treasuries Put in For a Bullish Reversal; But Momentum Lacking

Treasury Note (10-Year)

Short-term Technical Outlook

Have we seen the end of bearish momentum for the benchmark T-note for a little while? After falling for six of the past eight weeks, the world’s safe haven finally found its footing in the vicinity of notable support. A notable 61.8 percent Fib retracement of the June 2007 to December 2008 rally helped to confirm a rising trend (there confirmed points are needed to verify a trendline); and finally curbed the multi-month long decline with a reversal at 114-16. We are still in a medium-term bear wave; so projecting upside potential is looking for a retracement rather than a reversal. The first zone of distinction comes in around 117-14/16 which is both the 50% retracement of the aforementioned wave and the 38.2 percent pullback of the May 11th to June 12th sell off. Upon review though, this is a relatively flimsy level.

UK Gilt (10-Year)

Short-term Technical Outlook

At one point, the 10-year Gilts’ drop last week seemed to usher in a break of 116.80. However, waiting for the weekly close, it was clear that investors’ convictions on direction were not set. The candle that comprised the entire week is a notable doji (a pattern that was present at the past three reversals in late December, early February and early March). Should this turn hold up, it would confirm the authority of the 50-week simple moving average and a double bottom formation with the February lows. However, the bearish trend from the March trend reversal still stands. A falling trend loosely defines the progression of lower highs since that top; but it is the pivot and 38.2% Fib at 118 that offers the solid level of resistance. We will look for either a break above 118 or below 116. The former could ultimately develop into a head-and-shoulders formation. The latter could simply spell out an aggressive trend change.

German Bund (10-Year)

Short-term Technical Outlook

The pace and direction of German government debt is not as clear as its US and UK counterparts. Following suit with the rest of the fixed income world, the 10-year bund was spurred on to an aggressive, bullish reversal last week. The 50 percent Fib pulled from the June 2008 to January 2009 rally provided a loose floor; which the market would have no qualms about temporarily breaking. However, after a tenuous test, the bulls would win out and produce a long lower wick. Looking ahead, the rebound for the Bund comes with few hard levels to work with. Immediate (but ultimately weak) resistance stands at 120, which doubles as the upper boundary to an ill-defined falling trend channel from March. The more technically-sound ceiling holds at 121.50. As a range bottom for nearly six months, this could prove a difficult boundary to run.

Japanese Government Bond (10-Year)

Short-term Technical Outlook

In an unusual turn for the Japanese Government Bond, we would see a clear and uninterrupted, three-day rally that tested the normal complacency of congestive price action. However, despite the 60-point advance, the market would not threaten to breech the boundaries of the 136.75 to 135.35 band that has developed over the past two-and-a-half months. We will have to watch for momentum across the government debt market; but unless there is a notable appreciation in treasuries the world over; the JGB’s advance is likely to fall victim to its range.

Written by: John Kicklighter, Strategist for CFDTrading.com
Questions? Comments? You can send them to jkicklighter@cfdtrading.com