There has been a compression at a weekly scale in thirty-year bonds. This is in the yield, not the futures price but the yield often produces more reliable signals as it is continuous – the futures price is always a patchwork of expired contracts strung together.
This compression comes as no surprise because there has been declining price movement in this market for some time. Confusion apparently reigns and that’s what a compression reveals. It also precedes a shift from uncertainty into a new trend, so we must be watchful here to see which direction that trend will take. Until recently it had seemed certain that bonds would decline in price, as soon as the end of QE came in sight but it hasn’t yet as the recent reduction in quantity or ‘taper’ was quite small – from $85bn per month to $75bn.
There is a fight going on however and we wait with interest to see who wins. Recent talk of deflationary pressures is supportive of bond prices, so the outcome is far from certain. There is also a daily-scale compression in the ten-year US treasury price that has probably already broken in the direction of higher prices, so keep an eye on that:
In the meantime, we had outstanding short recommendations in both US and German government (Eurobund) instruments from the 20th December edition. These signals have expired by now as daily-scale signals last about three weeks - but if you didn’t cover yet, do so now.
The German situation seems already to be resolving in favour of an up-move as a weekly-scale compression there which had apparently broken down has now reversed and there was afairly sharp up-move last week:
This now now looks like a break into a new uptrend, so we are thinking about recommending a long position. The main obstacle to this is the lack of resolution to the new US bond compression described above, but we are watching closely. Buy a dip in Eurobunds if one comes along within the week, but we don’t yet see whether it is also worth chasing strength.
Evidence that pressure is building for some new market movement also comes from copper futures, which are compressed at a weekly scale:
It is entirely possible that we will also see compressions in US equity indices soon, as the last signals were top extensions and prices have churned sideways since then. Stay short for now but these signals will ‘time out’ within the next week. An update:
More soon, on the longer-term outlook.