German Bonds Face Fresh Downside Risks After Technical Breakout

  • Ten-year yields breach 18-month range top at 51 basis points
  • Chart resistances for bund yield at 58, 69 and 76 basis points

The technical outlook for German bunds has taken a turn for the worse.

As markets adjust to a hawkish shift in policy rhetoric from the European Central Bank, Thursday’s significant breakout saw 10-year yields break above their 18-month range top at 51 basis points. The bearish chart development has the potential of sparking a speedy ascent in the yield toward its long-term equilibrium line at 69 basis points.

While the resolve of bund bears has been bolstered this week, the long-term trend remains structurally bullish. For that to change, the yield would need to almost double to make room for the notion of a long-term trend reversal. The 2015 “bund tantrum” peak at 106 basis points is critical and only a move above that would disrupt the multi-year pattern in place of lower highs in the yield.

Ahead of that level, the 200-week moving average at 69 basis points -- which presciently caught the bottom in the bund sell-offs of 2009, 2011 and 2014 -- will serve as an important barometer of market sentiment.

Intermediate resistances for German 10-year yields are seen at 58 basis points, which marks the 61.8 percent Fibonacci retracement of the 2015-2016 bund rally and the 200-week moving average at 69 basis points. After that, it’s the 76.4 percent Fibonacci level of the last two years’ advance at 76 basis points.

As for the spread between two- and 10-year German bonds, a medium-term base has possibly been confirmed in the spread, with the latest widening validating last week’s bullish reversal pattern just above the long-term averages

Yields across core and peripheral European bonds have surged as markets continue to adjust to ECB President Mario Draghi’s comments last week that deflationary forces in the euro zone had been replaced by reflationary ones, fueling widespread speculation that the monetary authority will announce plans for stimulus tapering in autumn.

  • NOTE: Sejul Gokal is a FICC technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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