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Bonds and Bunds

Bonds have dropped around the world in the last 24 hours. Prices also ended on a down-note on Friday, so have fallen for two straight sessions and the ten-year US treasury yield has risen from around 2.85% to almost 3%. and the thirty-year yield has risen from under 3% to over 3.1%.

This is no surprise, as 'emergency measures' by central banks are gradually being withdrawn, so rates are generally expected to rise in most parts of the world over the next few quarters. Bond and note yields should therefore rise too, unless central banks resume these 'measures' which include holding yields down by buying paper in the marketplace. Now, both Japan and China are apparently joining the US and Europe in the process of gradual tightening by removing these measures and (eventually) by joining the US in actually raising rates (China's most recent move last night is actually to loosen monetary policy by injecting cash into the system, against the recent trend). This could be undone by a recession of course, sparked by a trade war that goes beyond a few skirmishes but President Trump seems to be winning his war of escalating threats, so growth is probably not under immediate threat, at least from that direction.

So this rise in bond yields (meaning a fall in prices) looks to be more than just 'churning in the range' and is probably the start of a trend. Looking at the US, we can see good evidence of that, as weekly bond yields broke up from compressions earlier this year and daily ten-year note yields did the same yesterday:

Bond and note comps update2

There is one small doubt about this picture, which is that bond prices have now fallen into an area where we expect some support from an old compression. It could be that bonds and notes are simply now trading in a lower price range than the recent few weeks and that there will not be a down trend (yet). We would wait and see if this support holds and (if short) stay short for now. The bond price chart:Bond comp support

The picture is different in Europe but the conclusion is the same. Here, German Bunds have assumed 'safe haven' status and yields have been depressed for three years despite a vibrant German economy. Shorter maturities have had negative yields in that time and even the ten-year yield turned negative for a few weeks in the Autumn of 2016. The European Central bank has been signalling the end of its emergency measures which will entail the end of bond buying within the next six months. The process of 'normalisation' is well behind that of the US which probably means that Bund yields can rise substantially (i.e. prices can drop) more than their US equivalent from here.

There are no new signals, but Bunds briefly broke upward from a long-term trading range in May, only to run into a weekly-scale top extension that marked the end of that rally. Back down into the old range now? It seems likely:

Bund weekly top update

All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com