Bond Technical Strategy – Weekly by Lloyds TSB

The expectation last week that the long bonds could fall played out nicely as a major topping formation was triggered. The reason for this, whilst academic from a technical point of view, remains an interesting question.

The expectation last week that the long bonds could fall played out nicely as a major topping formation was triggered. The reason for this, whilst academic from a technical point of view, remains an interesting question. Without wishing to sound like a stuck record, there seems to be little but confirmatory signals in the commodity markets that demand for them is picking up. This week saw oil inventories continue to rise yet crude oil has not plumbed new lows. Whilst it is too early to call a reversal, this is an early sign of a possible turn around, no matter how unlikely that may seem at this stage. Gold has also had a volatile week sinking to $874 only to rally back equally hard through $900 and eyeing a break of the key $921 level. Is this being driven by fear, potential future inflation or a combination of factors? The answer is unclear at this stage but
clarification will come when (if) equity markets start to rally. Should this occur and gold continues to rise then it will be clear that the support has come from inflation fears (in which case bonds will come under increased selling pressure).

This ties into the prospects for long bond yields which seem to be leading a wave of higher rates. Understandably this is currently being dampened as we get to the 2 year part of the curve, but pressure nonetheless has been seen. In the near term a short cover rally is possible in all bonds (this is due to the proximity of major supports in global stock markets and the potential consequences of a breach), but the longer term set-ups continue to imply rising yields.

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