Fixed Income Markets

Treasuries Running out of Steam as 119 Resistance Looms

The benchmark 10-year Treasury note has risen for a fourth consecutive session Tuesday; but momentum there is a notable lack of momentum behind this short-term trend. Without the necessary conviction in price action, this market may find it difficult to overtake what is currently a triple top at 118-26/30. If the bulls indeed cave at the technical threshold, it would work to confirm the descending trend from April’s highs.

The 10-year Gilt has managed to bounce before plunging the one-year lows set back in July. However, the technical developments of the past few months are still painting a bearish picture. A head-and-shoulders formation is unmistakable with a shoulder at the 118.85 pivot. A controlled advance is probable as bulls work to retrace the sharp plunge last week; but maintaining momentum is will be more difficult.

Bunds have worked their way into congestion these past four months; but there is still a discernable bullish bias to the chop. Tuesday’s advance extended the bounce from the established rising trend of major swing lows. How long this climb lasts will depend on how confident bulls are when they reach 122.00/25.

Japanese government bonds have extended their five-week decline by testing lows not seen since mid-August. We are coming upon a moderate level of technical support in the confluence of a pivot and 38.2 percent Fib retracement at 137.00/25. However, it is interesting to note that market activity continues to settle from the 2008 highs. It will be far more difficult to produce breakouts with such staid markets.

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

Treasuries Extend Their Most Aggressive Rally Since January

Treasury Note (10-Year)

A bullish reversal met momentum through the end of last week to drive the benchmark 10-year Treasury Note futures contract from another successful confirmation of the rising trend that began back in July. However, if it were not for the much more prominent 61.8% Fib retracement of the July 2007 to December 2008 bull wave, this questionable technical level would likely give way. Trendlines have consistently failed over the past few months thanks to excessive volatility and periods of extraordinary correlation across the different security groups. The general, descending trend developed through price action since the turn of the year is still in play; but should the market drive us back above the 50% Fib of the aforementioned wave at 117-14, momentum will likely shift along with direction.

UK Gilt (10-Year)

Just a few weeks ago, it seemed the 10-year Gilt marked a turning point with a confirmed break below the 116.50 range low that had held back the bearish tide for the entire year. However, since then, we have seen the 50% Fib of the last long-term bull wave (June 2008 to March 2009) at 115.20 hold; and a subsequent reversal bring an abrupt end to the steady, bearish trend channel that has defined price action since the first quarter reversal from record highs. Currently, resistance is holding momentum back around 119.75/95. Fib resistance meets a notable pivot for the year and 27-week SMA (half a year) to define the next breakout level or insurmountable ceiling.

German Bund (10-Year)

The usually choppy and volatile price action behind the benchmark bund has finally given way to a very clear range. The bullish reversal that really took off last week has lost momentum at just the correct momentum from a technical perspective. Should the doji that has developed with Monday’s close (following two, aggressively bullish candles through the end of last week) maintains the 122.30/50 high, it would seem a genuine triple top. However, given the consistency of this new range high and the triple bottom / 50% Fib confluence at 120, we are looking at an unnatural position for this instrument to be in. A breakout is likely to come soon; and it won’t likely be a simple breech and follow through.

Japanese Government Bond (10-Year)

The benchmark JGB contract is enjoying its sharpest rally since the market meltdown back in October. Scaling more than 120 points in a mere three sessions, the bulls will likely find themselves winded very soon. And, when momentum does finally give way, there is ample resistance just ahead at 139.00 and then 139.40. So far, there has not yet been a clear signal that the rally is ready to pause; so confirmation is imperative to see whether 139 will lead to a turn or will be the next victim in the most aggressive swing since March.

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

Treasuries’ Pullback Struggling for Momentum

Treasury Note (10-Year)

Treasury yields have picked up over the past two weeks; but the bearish pull in 10-year Treasury Note futures has been relatively constrained when compared to the performance of the US dollar or Dow. A higher time frame chart shows there is a bullish underlying trend still in place starting with the trendline that began in late June of 2008 and has since notched confirmation in October and June of this year. However, this is a relatively loose level. Therefore, if there is a break below the 115-27 range low that has stood as support for the entire month (and offers a minor potential head-and-shoulders formation), there could be a short-term break and run to the next level of support at 114. A rebound on the other hand would initially target 118.

UK Gilt (10-Year)

Gilts have finally overrun range support at 116.50/00 that has stood as a floor for the UK debt market since November. This move confirms the tenacity and consistency of the bearish trend channel that has maintained the market’s pace since the March reversal. From a technical perspective, this past week’s bearish break was significant and could be considered the breaking of a neckline on an extended head-and-shoulders formation. However, the follow through on this technical shift (at least initially) has been relatively restrained. There is a notable 50% Fib of the last major bull wave around 115.00/25; but this lacking breakout has more to do with momentum. Should there be a successful test and rebuff of resistance founded in the former range support (which coincides with the top of the bearish trend channel over the past four months), it would suggest a steady downtrend.

German Bund (10-Year)

The Bund’s bullish break above 121.50 lasted for a little more than a week before the floor once again dropped out from underneath bulls. A look to the daily chart shows a clear and deliberately formed reversal; but the progression on the decline has been choppy. Now, a familiar level of support comes into view in the 120 pivot that acted as resistance between May 25th to June 19th – which also happens to be the mid-point of the June rally and 38.2% retracement of the larger July 2008 to March 2009 advance. A weekly view of this market shows a lack of regard to even clear levels like these; but should broader market activity remain constrained, this floor may hold up.

Japanese Government Bond (10-Year)

Rarely does the benchmark 10-year JGB bond futures contract respect a technical a distinct technical level. Oftentimes, a clear level of support or resistance is warped and bent before momentum takes off in the opposite direction. However, the low-hanging support at 139 (there was a more absolute high in the range from 139.30/50) proved itself to be a clear barrier to price action. The subsequent retracement from these highs is much more restrained that the June rally – suggesting it could be ultimately be a correction in a more progressive advance. Short-term support is seen around 138; but the next significant floor is not noted seen until 137.25 (a notable pivot and short-term 50% Fib retracement.

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

Treasuries Rally Tempered Growth Forecasts Offset Supply Glut

US Treasuries

• G8 Keeps the Focus on Financial Stability, Off the Dollar’s Reserve Status
• Record Treasury Sales Threaten US Debt’s Global Appeal

Treasuries Rally Tempered Growth Forecasts Offset Supply Glut

US 10-Year Treasury Note                3.852          -26bps (MoM)

Treasuries have marked a sharp reversal over the past month; and fundamentals would help catalyze the reversal. The advance that began back at the 114 low set on June 22nd has so far been the most progressive advance in the benchmark 10-year note since before the bull wave ended at the turn of the year. Looking at more chart data, we can see that this is still a correction in a larger decline. However, there is enough fundamental support to extend this advance on to a genuine trend change.

Through the gradual appreciation in Treasury yields over the first six months of this year, there has been very little improvement in economic forecasts. While there have been modest upticks in various, short-term economic indicators, these developments have yet to translate into national expansion. Annualized growth in the world’s largest economy was an annualized 5.5 percent through the first three months of the year. And, for those commentators hanging their hat on more timely data: the unemployment rate is at a 26-year high 9.5 percent; business activity is still contracting; and credit is still being held up at the bank level. The markets are naturally a speculative space; and forecasts for an eventual recovery will naturally be reflected in price action. However, a distant turn to positive growth and the threat of a double bottom or ‘L’ – shaped recovery is an undercurrent that cannot be fought for long.

Looking over the coming weeks, there will be a building wave of fundamental stress on the Treasury market. For growth, the advanced reading of second quarter GDP is due at the end of the month. This is a critical reading that will provide straightforward evidence as to whether the US can expand by late 2009 / early 2010 or the nation’s recuperation will be more arduous than policy officials and market participants had expected. Another, gradual driver for sentiment (and thereby demand for the safe haven Treasury) is earnings season. On one hand, concerns over the health of the financial sector and credit market will call attention to accounting figures for key financial players. Among the banks to release this week are Citigroup, Bank of America, BB&T and JPMorgan. Goldman Sachs has already reported record earnings just a month after paying off its TARP loans. This will no doubt raise political ire while most other firms and sectors suffer current economic conditions. The more general concern for earnings is for a sense of economic health from the business viewpoint. Sales, costs, orders and employment are essential components for growth in this large component of broader domestic production.

Another, factor that should not be overlooked is sheer supply. As the outlook for growth fades, we have seen demand pick up for government debt; but eventually, we will reach a natural limit on capital to sop up an ever increasing supply. The Congressional Budget Office projects the national budget deficit will quadruple to $1.85 billion by next year. So far, record auctions have been met with equally historic demand on high bid-to-cover rations; but eventually capital flows will run dry. This is especially true if other, large economies experience a quicker return to growth while floating smaller levels of debt (like the Euro Zone expects to do). Even longer term, if the US can’t reduce its shortfall relatively quickly, problems like healthcare, an aging demographic and still-excessive levels of leverage could eventually threaten the country’s solvency.

European Government Bonds

• BoE Announces it Will Reduce The Size of Its Weekly Gilt Purchases
• Will Eastern Europe Banks Spark a Financial Seizure and Bund Rally?

When Can European Officials Start Discussing Government Withdrawal?

UK 10-Year Government Bond (Gilt)                            3.840           -19bps (MoM)

While government debt in the US, Europe and Asia mark sharp rebounds, UK gilts have merely turned to consolidation over the past month. Where pressure for Prime Minister Gordon Brown to call a national election have eased, speculation for monetary policy and growth forecasts have filled in. Forecasts of an economic recovery towards the end of this year and into the beginning of next year seem to be universal. However, speculation for the United Kingdom has held stubbornly depressed. When the IMF released its updated growth outlook for the next two years, the promising numbers helped buoy consistently pessimistic market participants. In line with the world-wide turn in output, the global financial regulator predicted a 4.2 percent contraction through 2009 (a slight reduction from the 4.1 percent projection in April); but the outlook for 2010 was upgraded from a 0.4 percent decline to 0.2 percent expansion. Absolute demand for risk-free assets is a product of global sentiment; but the Gilt would further find a relative pickup in demand over the past week from the three-day G8 meeting. Leaders agreed that policy should be focused on fiscal sustainability and economic recovery rather than implementing plans for reducing budget deficits. Another interesting development over the past few weeks comes through speculation over the BoE’s policy stance. At the last meeting, the MPC left the asset purchase plan unchanged at 125 billion pounds. This has initially been taken as a sign that the government is coming to the end of its quantitative easing – though officials have warned investors not to look to deep into this move.

German 10-Year Government Bond (Bund)               3.382            -22bps (MoM)

The outlook for growth and financial health in the Euro Zone is split among its members. Recession is a common denominator for most of the regional economies; but while some are still reeling from the impact of recent record contractions, others are voicing a need to reduce debt and deficits by starting to work down government aid. German Chancellor Angela Merkel is the champion for removing stimulus. It may seem that the G8’s agreement to concentrate on fiscal stability has quieted her resolve; but language surrounding this topic stated the approach that different countries could take towards the eventual exit would vary. This is rhetoric likely tailored for Germany. On the other hand, there are still risks for Europe’s largest economy and its neighbors. Aside from a double dip recession, there is still a threat that Eastern European banks could default and trigger the next financial crisis. This is particularly troublesome for the Euro Zone because many of the region’s banks have not accounted for most of their losses through write downs. In the meantime, we will continue to monitor the economy’s and markets’ progress. The IMF upgraded its 2010 growth forecasts to 0.3 percent expansion and the ECB’s covered bond purchase plan seems to already have borne fruit before it has even been implemented.

Asian Government Bonds

• Prime Minister Aso Calls for a National Election in August
• Japan Looking to Take on Record Amounts of Debt, a Reflection of the Last Lost Decade

Bond Traders Torn Between Improving Growth Outlook and Deteriorating Political Scene

Japanese 10-Year Government Bond (JGB)              1.550             -16bps (MoM)

The benchmark Japanese Government Bond has rallied an astounding 2.5 percent in as short as a month’s time. This has been the most aggressive and consistent rally in prices since before the crisis peaked in September and October of last year. In fact, JGB are on pace to beat their US counterpart for the first time since 1999. This outsized move comes from signs that Japan may once again suffer from yet another ‘lost decade.’ Before the subprime mortgage crisis catalyzed the worst bear market and recession in three generations, the world’s second largest economy was already suffering from a lack of investment and credit. Though it has been over a decade, policy officials have been unable to shake off the effects of the last financial disaster through its failed banking system. Looking ahead, it is clear that the world is not going to see a ‘V’-shaped recovery; which means slow to recover demand in the US, China and other key trade partners could through Japan into an even deeper hole. Such prospects have dimmed even the IMF’s promising outlook for a 1.7 percent pace of growth in 2010 to follow up on the 6.8 percent contraction this year. Adding another facet to the trouble, political uncertainty has been thrown in the mix. A severe plunge in approval has forced Prime Minister Aso to call for a national election next month. The consensus is for a party change for the first time in half a century. Continuity is critical to support a recovery; and changing the rules of the game now may further undermine the struggle to emerge from the gloom.

How Far Will Treasuries, Bunds and JGBs Retrace?

It has been a choppy reversal; but with last week’s close, the T-note’s bullish inclinations have been confirmed. The 12.7 percent drop in from December’s highs to June’s lows, however, has produced significant resistance that can sideline rallies going forward. The immediate concern for an ongoing advance is momentum. A look at the daily chart for the past three active trading sessions shows a clear development in congestion (though this consolidation pattern is still backed by a very steady rising trend and is developing into an ascending wedge pattern). There is a Fib confluence immediately overhead that could offset the fledgling bull trend for the first time since June 22nd or provide momentum with short-term breakout follow through. A 38.2% retracement of the 3/19 to 6/22 decline and 61.8% pullback of the 5/14 to 6/22 accelerated tumble hold at 119-02/04.

After consolidating around a support line drawn off of the June 2007 and October 2008 lows, the 10 year note has rallied, signaling what may be the next bout of deflationary pressures.  A rally above 121.025 would create overlap with the decline from the top and suggest that the decline was corrective.  A new high would then be favored.  Until then it is possible that the 10 year drop below 114.080 in order to complete an impulse (5 waves).

The benchmark 10-year Gilt has clearly stalled in its bear trend from March. In the process of developing congestion over the past month, the market has developed a notable triple bottom around 116.50 (a progression from a swing low back in early February). This floor is surprisingly clear, especially given the choppy nature of resistance. There is certainly a consistent trend of lower swing highs since the March peak; but there is no easy trendline to develop from this progression. Instead, we will have to watch for any rallies that overtake important highs. The next level to watch above is 119.65. However, the bias is clearly bearish within this broad triangle; so our primary concern is 116.50 support.

Gilt wave structure is clear.  There are 3 waves complete at the 2008 high.  An unorthodox top was made in 2009 in what is probably wave b of an expanded flat.  If indeed wave iv is a flat, then the correction is in its latter stages, if not already complete at 116.05.  Elliott channel support defends the low.  A rally is expected.

With last week’s close, bunds have overtaken resistance at 121.50 and extended momentum to a fifth consecutive weekly advance. This rally is as steady as the advance during the worst of the credit crisis back in October/November of last year; yet it is not as aggressive. On the one hand, the reserved pace can fend off expectations of an equally sharp reversal. However, until confirmed, this advance may merely be a correction in a true bear trend. In trying to take stock of the larger trend, we will need to gauge the follow through in the current move and/or measure the extent of the next bearish reversal. Though it provide little stopping power on the way up, immediate support is seen at 121.50 and resistance taken in two levels: 122.50 and 123.50.

The Bund has rallied through 121.55, creating overlap with the decline from the 2008 top and in turn suggesting that the decline is a correction and the larger degree trend remains up.  Support begins at 120.76.

No other trend can claim to be as steady as the 10-year JGB’s advance from early June. We are currently working on the first four week advance since March of 2008. However, we may not close the fourth week in the green. The consistency of this advance as seen on the daily chart has developed a very clear trendline. However, after overrunning 136.75 and 137.25; resistance will grow much more oppressive around 139.00/40. This bottom of this zone is the top of congestion from February to March and the latter figure is the high for one of the market’s most volatile periods in years. We will watch for a break of 139 or below 138.50 for signs as to the next leg of the trend.

Commentary has not changed in months…”a 11 year head and shoulders top may be in the works and 142 should remain intact (if the pattern is to play out) as the right shoulder of the formation.  A break below the neckline would likely see a breakdown that carries into long term support levels of 122.50 and 116.41/117.20.”  It is possible that 140.16 is exceeded in order to complete a corrective advance from the 2008 low.

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

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

Treasury Yields Surge as Forecasts of a 2009 Rate Hike Balloon – Is This Realistic?

US Treasuries

•    Fed Approves 10 Banks to Repay TARP
•    International Calls to Abandon the Dollar and Treasuries Growing

Treasury Yields Surge as Forecasts of a 2009 Rate Hike Balloon – Is This Realistic?

US 10-Year Treasury Note      3.226          -8bps
Treasuries may have throttled back on momentum at the start of this week; but the deeply entrenched bearish trend is still in place. Over the past few weeks, the gradual and passive decline in treasury instruments (a rise in yields) has been leveraged by the same shift in risk appetite that has swept over the more speculative asset classes the past three months. The accelerated shift away from risk-free assets back into the open seas of the market reflects the general belief that financial conditions are stabilizing, the pace of recession is ebbing and the Fed is contemplating rate hikes in the near future. This is a volatile mix to support the sharpest drop in the benchmark 10-year T-note since April of 2004; but will the fundamentals pan out to support this reversal in the market’s fortunes?

The most tenuous support for a rebound in risk appetite is what market commentators call ‘green shoots.’ A letup in the pace of pessimism, the contraction in consumer spending, drop in investment spending and so many other critical factors has clearly developed; but an improvement in the pace of recession is not a guarantee of positive growth. An objective review of the data that has come out these past weeks supports the need for caution when making investment decisions. The symbolic thermometer for economic health, the non-farm payrolls release this past Friday marked a far-smaller than expected 345,000 net loss. Nonetheless, this was still a significant loss which finally pushed the total number of jobs losses since the beginning 2008 above the 6 million mark and inflated the jobless rate to its highest level since August of 1983. It follows that consumer confidence is still underwater and all progress made in sentiment is based in forecasts that are perhaps too optimistic with the government’s ability to recharge growth. In the meantime, consumer spending has fallen 10 times over the past 12 months and businesses are still reducing spending and trimming payrolls.

Growth may be the more publicized fundamental driver for risk appetite and the Treasury market; but the stability of the financial markets holds the greater potential for cutting the rally in yields short. With a focus on the eventual recovery in growth, it seems a foregone conclusion that the calm seas since the peak of the crisis back in September/October have ensured risk is no longer a concern. However, even Fed Chairman Ben Bernanke – who is supposed to be a cautious cheerleader for the economy – has warned about the fragile nature of the financial recovery to this point. Record low rates in short-term market and government debt is more a reflection of the artificial liquidity provided by the government than natural supply and demand. In the weeks ahead, the market’s susceptibility to falling back into a fear-fueled diversification into safe-haven assets will rest on the progress of TARP repayments, efforts to improve the public-private investment plan and ill-conceived speculation of a Fed rate hike in the near future. This morning the Treasury approved 10 banks’ plans to raise capital to satisfy a requirement to repay their TARP loans. With much of the capital coming in through the recent rise in risk appetite; there is too much dependency on fickle market sentiment to support a true recovery in the vital financial sector. What’s more, there were notable exceptions from the list of those that were approved, including Bank of America, Citi and Wells Fargo. A far greater concern than unwinding the liquidity offered to banks, is the glut of toxic debt still in the market. Treasury Secretary Geithner’s ambitious public/private plan has garnered interest from well-financed speculators; but the drop in yield has dried the well of acceptable investors. The solution of opening the market doors to other large pools of capital (like insurers and pension funds) merely cycles these toxic derivatives back into the market and raises the potential of another crisis. With these lingering threats and Fed officials weary of the risks, the priced in expectations for a rate hike before the year’s end is premium that will almost certainly be deflated.

European Government Bonds

•    Gilts Reflect Volatility as Political Unrest Interferes With Crisis Management
•    Bund Traders Must Weigh Policy Officials’ Forecasts Against Deteriorating Sovereign Debt Ratings

European Government Bond Yields Rising as Forecasts for Growth Improve, Policy Makers Take Conservative Approach

UK 10-Year Government Bond (Gilt)          3.285         -23bps
While yields on US government paper have surged over the past few weeks; the equivalent Gilts have held relatively stable as the government struggles to put the economy on stable ground. As risk appetite has inflated since the April turn, there has been a controlled diversification away from the UK risk-free paper. From the economic front, there are the same, tentative signs of an economic recovery that have been noted in the US, Euro Zone, China, and even Japan; but the conviction in this catalyzing a true turnaround is lacking. In the past few weeks, data has shown tentative improvements in key sectors. The housing sector has reported a slower pace of contraction in housing prices and the highest level of mortgage approvals in a year. Business activity has similarly improved with the smallest contraction in manufacturing in a year and the first expansion in the service sector in the same amount of time. Even consumer confidence has edge back into positive territory. However, the outlook for growth is still bleak. The IMF pegged the UK economy to the worst recession this year among the industrial nations; and that forecast is not likely to chance with the turn in sentiment measured in the markets recently. This is particularly true should political turmoil heat up. Calls for PM Gordon Brown’s resignation last week forced the administration to reshuffle it ranges. Should Brown or Chancellor of the Exchequer Alistair Darling be eventually ousted, the efforts towards a recovery could be permanently shelved.

German 10-Year Government Bond (Bund)    3.340          -1bps
Like most other government, fixed-income traders the world over, those in the Bund market have followed the unhealthy pace of growth in the asset’s underlying country. However, speculating when the economy will finally turn to positive growth took a back seat to more pressing matters. This past week, the ECB rate decision stirred up interest in yields as market participants were eagerly awaiting confirmation on the central bank’s official stance on monetary policy. In the weeks leading up to the gathering, a divergence in approach was once again developing. The central bank voted to hold rates and keep its covered bond purchasing program at 60 billion euros as expected; but from the rhetoric of the statement and comments of President Jean Claude Trichet, it was clear that the option for easing policy further down the line was still there. Balancing the future of rates as a source of return and a stymie to growth will be a critical fundamental driver in the weeks ahead (especially when policy members decide to air their opinions on what should be done through public forums). However, the health of economic growth and financial markets may have a more pressing influence than speculating on the monthly rate decisions. Despite tentative signs of improved growth, the region is still struggling. This past week, the S&P downgraded Ireland’s debt rating from AA+ to AA and set a negative outlook. Elsewhere, Latvia has been pushed to the brink of crisis and is now working on securing an IMF loan to prevent a bank default that could send waves throughout Europe. This leaves us to wonder: are policy officials forfeiting the advantage of getting ahead of the recession by being so frugal?

Asian Government Bonds

•    Consumers Won’t Be The Catalyst for an Economic Recovery with the Worst String of Earnings Losses Since 2003
•    Business Cut Back on Spending at the Fastest Pace on Records Going Back Over Half a Century

Japanese Officials are Confident The Worst Is Past, But How Long Will the Recession Last

Japanese 10-Year Government Bond (JGB)    1.716           3bps
There is an international effort to benchmark the pace of recovery and recession that each economy is experiencing relative to their major counterparts. Though, regardless of the general improvement in risk appetite and tempered pace of the global recession; the Japanese economy will lag the Western economies. Over the past few weeks, the Cabinet Office and Bank of Japan have joined the crowd by announcing the worst of the recession has passed. This is perhaps an overly optimistic forecast for an economy that just recently printed its worst pace of contraction on record. As we go forward, the health of key sectors will factor in towards establishing the probability of a recovery anytime soon. Recently, capital spending figures for the first quarter plunged the most on records going back over half a century and the output gap (the difference between supply and demand) similarly ballooned to a record. These two issues call to attention the long-term troubles even after headline growth returns. Investment and deflation could weigh on the Japanese markets for another decade as exports and domestic consumption struggle to keep the world’s second largest economy afloat.

Slide In T-Note Accelerates, Other Treasuries Ease Up On Momentum

Treasury Note (10-Year)

Short-term Technical Outlook

The 10-year treasury has experienced extraordinary pressure over the past week. An initial observance of the mid-point of the June 2007 to December 2008 rally was unceremoniously erased in a third consecutive weekly plunge. Considering the character of last week’s candle, follow through looks to be a major threat; but momentum is far from certain. What is definite though is the relative weak influence support there is around 114-10/28. The rising trendline that began back in June is unsubstantiated and the 61.8% Fib of the same bull wave is otherwise unconfirmed.
 

Long-term Technical Outlook

The 10 year is holding above the 400 week SMA (save for a few days last week) and the series of lower lows and lower highs since early 2006 is intact so there is no reason to alter the bullish outlook.  Favor the upside and anticipate a record high.
 

UK Gilt (10-Year)

Short-term Technical Outlook

The 10-year Gilt has been one of the few government securities that has held back from developing its bearish intentions. However, this past week, an otherwise uneventful drop below 118.00 has led the benchmark one step closer to a more pervasive reversal. The aforementioned level has stood as a pivot for the whole year; the wide-range bar closed the week has clear this hurdle. What’s more, with this decline; we have confirmed and developed follow through on the break of the rising trendline going back to back to June 2008 lows. However, we still have not exercised the head-and-shoulders pattern that has been developing for this market for nearly 8 months now. We will monitor the 116.80 level as the neckline on this formation. 
 

Long-term Technical Outlook

Gilt wave structure is clear.  There are 3 waves complete at the 2008 high.  An unorthodox top was made in 2009 in what is probably wave b of a triangle.  If indeed a triangle is unfolding, then wave c completed last week and waves d and e should unfold over the next month + before a thrust higher completes the entire rally from the 2007 low. 
 
 
German Bund (10-Year)

Short-term Technical Outlook

Through the second half of last week, the Bund’s decline gained momentum. After taking out the 50-week SMA and pushing the boundary of a falling trend channel; the market is now taking a break at 118.00/25. This zone is held up by a 50% Fib retracement of the July to March bull wave and the general marker of the March 2008 swing high. Another sharp decline (like the kind we have been seeing regularly interspersed with congestion over the past three or four months could quickly take us to new lows. Vigilance is essential.
 
Long-term Technical Outlook

The Bund is similar to the gilt in that I anticipate a new high in a 5th wave within the 5 wave advance from the 2008 low.  Wave 4 may be complete at last week’s low. 
 

Japanese Government Bond (10-Year)

Short-term Technical Outlook

As it usually does with the Japanese Government Bond, congestion has grown messy. The tight congestion zone between 136.60/20 did not last long at all; but the ultimate break would not come equipped with anything resembling follow through. The jump back above the former support at 136.60 has invalidated this level as a meaningful technical definer; but larger figures are still in place. The long-term 50% fib is still in place at 61.8% below and there is plenty of chop above to slow rallies. 

Long-term Technical Outlook

Commentary has not changed in months…”a 10 year head and shoulders top may be in the works and 142 should remain intact (if the pattern is to play out) as the right shoulder of the formation.  A break below the neckline would likely see a breakdown that carries into long term support levels of 122.50 and 116.41/117.20.”  This is one of the best trade opportunities of the next year +.

 

 

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

Treasuries’ Bearish Reversals Losing Momentum

Treasury Note (10-Year)

Short-term Technical Outlook

After two weeks of aggressive declines, bearish momentum seems to have stalled for the benchmark 10-year T-bill. While this is likely more a factor of ebbing market forces (as we have seen the same drop in the US dollar and rally in equities cool), technicals were present to put in a floor on price action. The 50 percent Fib retracement of the June 2007 to December 2008 bull wave at 117-14 has helped to hold the market back; but it is not producing a steadfast stop. The 50-week moving average is further brining up support – and reminding us of the long-term bull trend behind this market.

Long-term Technical Outlook

The 10 year is holding above the 400 week SMA (save for a few days last week) and the series of lower lows and lower highs since early 2006 is intact so there is no reason to alter the bullish outlook.  Favor the upside and anticipate a record high.

UK Gilt (10-Year)

Short-term Technical Outlook

Unlike its US counterpart, the 10-year Gilt has deferred to congestion for more than a month now. The tempered pace of declines in government paper across the globe has helped to dampen week-to-week volatility and solidified frequented support. A floor has been fashioned out of 118 following the 38.2% Fib retracement on the May 2008 to March 2009 advance. However, stops should be set relatively wide, because price action is not reversing immediately upon tests of this level. Medium-term momentum is still bearish, but this is just a retracement in the long-term trend.

Long-term Technical Outlook

Gilt wave structure is clear.  There are 3 waves complete at the 2008 high.  An unorthodox top was made in 2009 in what is probably wave b of a triangle.  If indeed a triangle is unfolding, then wave c completed last week and waves d and e should unfold over the next month + before a thrust higher completes the entire rally from the 2007 low.

German Bund (10-Year)

Short-term Technical Outlook

The break below 121.75 has found follow through – though it has been choppy progression.  Over the past two weeks, however, we have seen high volatility and relatively narrow ranges. This has led to a couple of wide doji candles that have shown respect for support down around 118.50.  This is a level of support defined as a former resistance point through the most of 2008 and more recently as the bottom of a trend channel, a 50-week SMA, and 50% Fib pulled from the June/July 2008 run up all around 118.00/50. Once again, wide stops and aggressive entries are best for those looking for breakouts and reversals

Long-term Technical Outlook

The Bund is similar to the gilt in that I anticipate a new high in a 5th wave within the 5 wave advance from the 2008 low.  Wave 4 may be complete at last week’s low.

Japanese Government Bond (10-Year)

Short-term Technical Outlook

There are few markets that can boast congestion as consistent as what the 10-year JGB futures contract produces. This past week, the market finally took out another horizontal channel. However, unlike the break from the November-March zone, this recent breech is from a pattern only six weeks in the making; and the follow through has immediately dissipated. Support is now stepping in at 136.20, a long-term 50% Fib (a trend across the government bonds) that has little influence beyond this single level. Currently, the band holding back price action between 136.20-60 is too narrow to last. Expect a minor breakout relatively soon.

Long-term Technical Outlook

Commentary has not changed in months…”a 10 year head and shoulders top may be in the works and 142 should remain intact (if the pattern is to play out) as the right shoulder of the formation.  A break below the neckline would likely see a breakdown that carries into long term support levels of 122.50 and 116.41/117.20.”  This is one of the best trade opportunities of the next year +.

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

Treasury, Bund Bearish Reversal Lacks Momentum

Treasury Note (10-Year)

Short-term Technical Outlook

The break below 122-03 last month may have been pivotal for the ten-year Treasury note; but the price action we have seen since then wouldn’t suggest so. Monday’s decline pushed the contract below the abovementioned level once again; but there is still a range of support that has to be surpassed before the bear wave is back underway. An immediate hold up to declines is the 200-day SMA that matches the intraday pivot for the past three weeks around 120-16. This could turn into a significant trend deflector should momentum vanish. Otherwise, the next target is the swing low from the 8th at 119-22.

Long-term Technical Outlook

The 10 year is holding above the 400 week SMA (save for a few days last week) and the series of lower lows and lower highs since early 2006 is intact so there is no reason to alter the bullish outlook.  Favor the upside and anticipate a record high.

UK Gilt (10-Year)

Short-term Technical Outlook

The bearish reversal the gilt was able to win in March has struggled to develop its footing. This past week, the break below 120 was retraced just as quickly as it was won. Temporary resistance is seen around 121.35; and with the presence of the nearby floor, there is bound to be a breakout (regardless of direction) soon. There is a loose trend of lower lows still in place starting with last month’s swing high; so the technical bias is still bearish until 123.50 comes back into view.
Long-term Technical Outlook

Gilt wave structure is clear.  There are 3 waves complete at the 2008 high.  An unorthodox top was made in 2009 in what is probably wave b of a triangle.  If indeed a triangle is unfolding, then wave c completed last week and waves d and e should unfold over the next month + before a thrust higher completes the entire rally from the 2007 low.

German Bund (10-Year)

Short-term Technical Outlook

Just a few months ago, the bund was cutting a clear channel between 124.65 and 123. Since then, however, we have seen sharp burst of volatility that follow little technical pattern to an end. However, with the bullish reversal from 120.10, we can start to see the rhyme to this technical noise. This reversal occurred on around a major 38.2% Fib retracement pulled from the June to January rally. Another use for this reversal is to further confirm the presence of a descending trend channel that began in February/March. We will see pressure build between this hard support and traversing trend; but as of yet there is still plenty of room to maneuver.

Long-term Technical Outlook

The Bund is similar to the gilt in that I anticipate a new high in a 5th wave within the 5 wave advance from the 2008 low.  Wave 4 may be complete at last week’s low.

Japanese Government Bond (10-Year)

Short-term Technical Outlook

The benchmark JGB is back to cutting trends; but not of the sort that is attached to high volatility and fresh highs or lows. Instead, we seem to have returned to the same pace of congestion that the market was stuck to between November and March – though this time around the trading band is far more constrictive. Over the past three weeks, a series of lows has built up around 136.50 while a loose ceiling around 137.35/50 has capped attempts at retracing the March plunge. This is a tight range and will not likely last as long as the previous one.
Long-term Technical Outlook

Commentary has not changed in months…”a 10 year head and shoulders top may be in the works and 142 should remain intact (if the pattern is to play out) as the right shoulder of the formation.  A break below the neckline would likely see a breakdown that carries into long term support levels of 122.50 and 116.41/117.20.”  This is one of the best trade opportunities of the next year +.

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

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