Aussie-U.S. Yield Gap May Reach December Low: Technical Analysis

The spread between yields on 10-year Australian government bonds and similar-dated U.S. Treasuries may decline to the narrowest since December, RBC Capital Markets said in a report, citing trading patterns.

The gap, which was at 195 basis points today, may fall toward 173 basis points after it declined last week to below 188, the 23.6 percent retracement of a drop last year from the 242.28 high of Oct. 17, to the Dec. 26 low of 170.96, RBC said in a research note from Toronto-based analysts Paul Borean and George Davis. A basis point is 0.01 percentage point.

Investors may want to take on trades that benefit from a tightening in spreads as the gap rises toward 198 basis points, “with the trade looking even more compelling near 206 and 212,” Borean and Davis wrote. “The medium and longer-term bases at 179 and 173 serve as target levels in this regard.”

RBC also said trading patterns indicate Australian three-year and 10-year bond futures may extend recent declines, while an increase in the spread between the two probably has run its course.

Three-year futures may fall toward 95.95, and would need to rally above 96.52 for RBC to change its forecast for declines, the analysts wrote. Ten-year contracts are likely to slide toward 95.33, provided they close below 95.93, according to the note. The spread between the futures may approach 58 basis points, then drop toward 39, Borean and Davis wrote.

Three-year bond futures for June delivery were at 96.15 as of 12:10 p.m. in Sydney, from 96.20 yesterday, according to prices from the Sydney Futures Exchange. The 10-year contract was at 95.61 from 95.68, while the spread between the two was 55 basis points from 51.

A resistance level is an area on a chart where analysts anticipate orders to sell a currency will be grouped and a support level is an area where they expect buy orders to be clustered. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, currency or index.