Bond Technical Strategy – Weekly by Lloyds TSB

The prospects for a short cover rally in bonds was discussed in the previous document, but despite this the acceleration and extent of the rally was beyond a normal market retracement.

The prospects for a short cover rally in bonds was discussed in the previous document, but despite this the acceleration and extent of the rally was beyond a normal market retracement. The main reason for this is the close proximity of support in the equity markets, (the main levels being 7450 in the dow and 800 in the S&P) and the technical
implications of a breach. Although equities continue to flirt with these dangerous levels, an actual break is still illusive. Providing a counter balance to this is the developing upward trend in the Chinese stock market. Unless there has been some form of decoupling, (which seems unlikely) either US shares are close to a floor or Chinese
shares are set for a correction. From an inter-market perspective the former scenario looks more likely, but until this situation is resolved bonds, (and indeed FX) may struggle for direction.

The prospect for bonds to lurch due to the extent of the diametrically opposed views is large, however the core theme of looking for weakness to unfold in 30 year bonds remains. Adding weight to this scenario was the breach of $921 resistance in gold and $1000 in platinum. Both have produced extended rallies and whilst it could be argued this is ‘safe haven’ buying, the likes of which would support bonds, broader commodity demand persists and, in time, is likely to push yields higher.

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