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Treasury & Bond market review (weekly), after 18th May, 2012.

Spanish PM’s remark about risk of losing access to debt funding for his nation, became bad for market. As Spanish borrowing cost jumped but situation were not same for Germany, as investors are still jumping for their Bonds even with such low yields. Look like everyone is giving priority to quality, as 10-year government Bond yields of many highest rated Euro zone nations also dropped to their lowest level. But in this period of time we cannot expect same things from different PIIGs nations which are again showing trend of rising Bond yields especially after lots of rating downgrades through out this week.

10-year German Bond yield dropped to their lowest figure but things were not same in earlier after German growth report. On the other hand French people must be happy with the falling borrowing cost in their auction after new president took office. Last week I was suspecting about 10-year Spanish Bond yield, as such this week it jumped to 5 month high. I am thinking about the losses which many Spanish banks are suffering due to their exposure in their government bonds. If today market are questioning about Spanish banks due to their exposure in sovereign debts then tomorrow they will question about other banks of different nations. In fact they may question about the whole concept of easy liquidity provided by ECB!

YIELDs (US)
18th May, 2012
5/11/2012-5/18/2012 (%)
5/04/2012-5/11/2012 (%)




2-Year Treasury
0.292
17.74
-3.13
5-Year Treasury
0.743
-0.67
-4.35
10-Year Treasury
1.714
-7.1
-1.65
30-Year Treasury
2.797
-7.11
-1.95

Beside Euro zone matters, reports from US also affected US Treasury yields. 10-year US Treasury yields fell for a 9th strait week. This week the movement long-term US Treasury yields were quite big in fact those are showing a new trend.



Treasury & Bond market forecast for coming week.

Events are moving among Greece, Spain, Italy and Portugal in Euro-zone. For some time if Greece gets place in the headlines then next it becomes Spain or Italy. If things move this way then financial market may not come out from this theatre, unless ECB does something different. Bonds yields of different problematic nations of Euro zone are gradually reaching to those levels which remind us the situation of last year. So something is needed from ECB if they want to keep their boundary intact. Euro zone leaders are worried about consensus considering the G–8 meeting but I don’t think that there will be much change in outcomes after the meeting.

It doesn’t look like that situation is going to change dramatically in debt market, so this same trend is expected to go in coming days in Euro zone. The way US Treasury yields drop this week, it changes lot of calculations as such suddenly it looks like that it has a chance to drop more. In fact most of the long-term US Treasury yields are now showing bearish trend in the chart. So it will be important to see whether it drops in a straight way or it takes time for that.

Last week, I was expecting that 2–Year US Treasury Yield is making a base and it has a chance to reverse its position, as such it got the resistance at 0.30 level. Now I have a feeling that 2–Year US Treasury Yield is again going to re-test around 0.27 level in early days of the coming week but if it chooses to go higher levels from the starting then it has the chance to test 0.32 level.

5–Year US Treasury Yield was above the range of 0.70 which I mentioned in earlier weeks, so the pattern is still exist for it and 5–Year US Treasury Yield can trigger that if it breaks 1.20 in the upside. It is true that 5–Year US Treasury Yield is falling during last few months and it is not showing any definite chance of reversal. So I am again focusing in that 0.70 level and if it maintains that level then there is a chance that we may see a reversal in coming days. It is also due to fill up the gap which it has created in the upside. But the way other long-term US Treasury yields have performed this week, if it follows that trend (with one or two days reversal) then it has more chance to drop below 0.70 level and then it may not act on that bullish pattern.

10–Year US Treasury Yield broke an important level of 1.80 in the downside and I think that there is no need of any more confirmations, as it is out of that positive pattern which I said in past. Last week I was telling that it is in less over-sold position than others so it has more chance to drop but now I have a feeling that it may test lower levels in coming future. As it looks like that it makes a bearish pattern which says that it can drop more even after considering that it is in oversold zone. From here if it wants to reverse it will get strong resistance at 1.80–1.90 levels.

Last week I was expecting that 30–Year US Treasury Yield may bounce from 2.80 level which may be due in coming days. But now I don’t think that it is going to react on that bullish pattern which I mentioned. On the other hand I have a feeling that it is making a bearish pattern; though like 10–Year US Treasury Yield I cannot say for sure that it had already did it in this week. As such now it can drop from here or it may go more in the upside (but below 3.45–3.50 level) and then drop in coming future to make a bearish H&S pattern. So, different options are open for it.

Greece is heading for a new election in next month and I think that most of us can guess the outcomes. But what will happen in between this? This week ECB stopped lending to some Greek banks which may fuel different assumptions. Greece has to go long way both politically and economically, unless they select the short-cut!


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