Investors should bet the yield gap between Treasury 10-year notes and comparable German bunds will narrow amid mixed U.S. economic data and an accommodative Federal Reserve, according to CRT Capital Group LLC.
A head-and-shoulders pattern formed on a chart by the spread indicates it may narrow to 12.5 basis points, or 0.125 percentage point, and might decline to zero, David Ader, head of government-bond strategy at Stamford, Connecticut-based CRT, said in a telephone interview. The gap contracted to 26 basis points today, from 29 basis points on April 23.
“Fed policy and the reasonable risk of some further accommodation lend itself to this trade,” Ader said. “The data and the Fed all lend themselves to a continuation of the Treasury market, the 10-year specifically, doing well.”
Fed Chairman Ben S. Bernanke said yesterday he’s prepared to do more to spur economic expansion if needed, and the central bank repeated a plan to keep the key interest rate “exceptionally low” until at least late 2014. It’s been at zero to 0.25 percent since December 2008.
“It’s a trade that is following through on the bullish performance of Treasuries,” Ader said, adding that investors should buy the spread between 26 basis points and 30 basis points.
The 10-year bund yield fell six basis points to 1.68 percent today as euro-area economic confidence slid and Spain’s prime minister said his country’s ability to fund itself is at risk. The yield reached a record low 1.63 percent April 23.
“Bunds are rich, and I do have ongoing concerns with Europe,” Ader said. “I don’t see tremendous risk that this spread should move the other way, given what we know is going on with Europe’s economy.”
A head-and-shoulders pattern is formed by three consecutive peaks on a chart, with the middle being the highest. A breach of a neckline connecting the base of the three peaks may signal the reversal of a trend.
In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.
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