Tuesday, 17 November 2009

Euribor spread analysis

Euribor spreads have fallen in the front end as it is almost certain rates are going to remain low for some to to come. As Dec09 Euribor comes closer to expiry the spread between Dec09 and Mar10 will likely continue to fall until it is at parity or negative. The dec-march spread is trading at 6.5s falling from low teens last week as Euribors continue there march upwards.
Short sterling paints a similar picture, as the bank of englands decision to keep the possibility of further quantitative easing open has kept short sterling bid. Coupled with the fact the UK is still in a recession suggests that rates are going to remain low for a long time still. Front month short sterling Dec-Mar spread has come off 5 ticks from last week as we trade 11s. It is also likely this spread will continue to come as we reach closer to Dec Short sterling expiry.

Bund analysis

From a technical perspective the Bund continues to trade sideways trapped between strong resistance at 123.00 and support at 120.00. Messy trade has continued over the last five days and at current there appears no bias in either direction. The US Ten Year continued to outperform the Bund as it reached highs of 119.230 last night. The high of the previous double top formation at 119.290 appears to be under threat and a test of this level later this week looks likely. If this resistance were to break, further levels to the upside can be found at 120.180 and 121.095.
Last night Bernanke highlighted his concerns over a weak labour and slow recovery and in doing so signalled that current exceptionally low rates were here to stay for the foreseeable future. This was taken as very bullish news by the treasury markets as concerns were eased over the timing of the Fed’s exit from monetary stimulus. With this now in traders’ thoughts we would expect to see a flattening of the yield curve over the next few days as the longer end attracts more attention.
The only fly in the ointment of the Fed’s plans for an extended period of low rates could come from a surprise rise in inflation data. This week we will see the release of US PPI and CPI. Both of these are seen as backward looking so a figure above analysts expectations may be send jitters through the fixed income markets as this could interrupt the Feds plans. We do not expect these to surprise to the upside but they must be considered the best indicators when predicting the timing of the Feds removal of its low rate policy.

Tuesday, 3 November 2009

Bond overview

Overview
Over the last five days we have seen an increasing degree of volatility in the Bund and despite messy trading it has posted gains of almost 1 point. The performance of the US Ten Year was more impressive as it capitalised on equity weakness in rallying almost 2 points at one stage

From a technical perspective the Bund is looking increasingly bullish despite the daily double top formation still being in place. An hourly inverse head and shoulders has formed which also contains an hourly bull flag. The neckline of the inverse head and shoulders formation is 121.69, with the target being recent highs at 123.04 (incidentally there is a very similar target for the hourly flag). If this target was reached it would give the bulls another crack at breaching the double top formation opening the door for a significant push higher. A similar inverse head and shoulders formation can be seen in the US Ten Year with a target beyond the previous daily double top formation. The neckline is at 118.260, this provides a relatively low risk trade with a target at 119.170.

This week will see rate announcements out of the ECB, BOE and Fed, and although no rate changes should occur, the accompanying statements have the potential to move markets dramatically. We will be keen to see whether the BOE extends its QE scheme, at this stage many analysts are touting a £30 billion extension but many permutations are possible. The only surprise we feel the ECB could spring on the market would be a schedule for the removal of the LTRO, this is something member Webber hinted at last week and Trichet may further comment on this Thursday. Finally on Wednesday we will get the latest statement out of the FED, and we are keen to see if they remove any of their liquidity programmes.

Last night Australia raised their interest rates for the second time this year and although it is not a good indicator for Europe or the US it is a reminder of what is to come and will no doubt affect traders psychology as more countries look to rate hikes.

(Taken from futex)

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