Bond Technical Strategy – Weekly by Lloyds TSB

On the face of it, bond yields should be much higher this week. The reasons for this, discussed in last week’s release, have by and large come to fruition. i.e. equities are higher (led through the more speculative emerging market space), commodities are under pinned and the pro-cyclical currencies (AUD, CAD, NZD and GBP) have all benefited against the yen and dollar (implying risk attraction and a move away from wafer thin bond yields).

On the face of it, bond yields should be much higher this week. The reasons for this, discussed in last week’s release, have by and large come to fruition. i.e. equities are higher (led through the more speculative emerging market space), commodities are under pinned and the pro-cyclical currencies (AUD, CAD, NZD and GBP) have all benefited against the yen and dollar (implying risk attraction and a move away from wafer thin bond yields). Whilst there has been a steepening of the US curve, this is still relatively muted considering the backdrop.

The long term outlook (beyond 6 months) does favour a reversal of the above factors, but the developing medium term trends should be powerful enough to register in the shorter end of the curve, although this has yet to occur. Consequently, the strategy over the next few weeks is still to favour higher bond yields,but until the 2-5 year part of the curve begin to respond to the above factors, the main
focus will stay on selling 10 and 30 year bonds until the situation is clarified.

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