- New Science in old markets -

Bonds and Bunds in the medium term

The enormous scale of bond-buying by various central banks, using newly-printed printed money has pushed up bond prices everywhere. Prices are the inverse of yields, which are now very low by historic standard and no-one has a clear idea what happens next. This massive purchasing exercise is apparently being wound down but that still leaves the central banks with huge quantities of bonds that will fall due as time goes by. Meanwhile, deflation seems to be lurking and there is a concerted campaign among central bankers to proclaim that low interest rates are here to stay, and even if they rise a bit eventually, it won’t be by much. Deflation and a low rate outlook are both reasons to buy bonds, so it seems possible that prices may not collapse as soon as the purchases by central banks finally end.

Our methods work best when markets are free to move where they will in the normal constant auction process and this large-scale interference in bond markets has clouded our vision for some time - we have produced few bond signals for many months but we now start to see some patterns here. 10-year note and 30-year bond yields have both fallen a bit since the start of the year and this began with weekly-scale compression in  30-year yields. It has continued with further compressions in both 10- and 30-year yields, all of which have broken lower:


Bond and Note weekly comps


This makes it likely that yields will keep falling and so prices rising. The German bund market has also been strong for some of the same reasons and this led to a daily-scale top extension two weeks ago.  In strong bull markets, such signals lead only to a pause in the trend and when the signal has expired it is usually safe to re-enter. That moment is probably close at hand. Buy dips in Bunds and US ten-year notes and probably 30-year bonds too…


Bund ext 10yr chart daily