IIFT Daily Note with Peter Brown

Bonds come to the fore

Posted by:  |  Time: 7:34 am  |  Topic:  |  Comments: 4
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The market has now decided to focus it’s attention on bonds. The bond yield in the US is starting to rise( up .5% in the last month). Periphery bond yields in Europe are also rising and also in Japan. The market has been very relaxed over the last year. QE and Draghi’s OMT programme have kept yields low, so for the bond trader it was a one way bet. What has changed?

Firstly the market is starting to discount tapering of QE in the US. Secondly there are questions regarding the OMT. Afterall it has never been used, but now it is subject to a challange in the German courts. Thirdly there is Japan. The market want announcemnets of fresh stimulus every time the Fin Minister speaks. The japanese are causing aspirations of economic recovery they are likely unable to deliver. This is causing extreme volatility to the stock, bond are currency markets in JPY.

All this is making the market very nervous. I have said before if bond traders sell on mass  it will be carnage. We need to see the 10 year US bond settle down. It is currently at 2.20% up from 1.75%. It needs to stabilise here and not head much higher. A loss of confidence in the bonds will cause heavy selling of stocks.

So we are at a pivotal point in the US, Europe and Japan. This is a game of confidence, if the market gets scared it will be very volatile.

We have to watch bond rates for the mood, European and US. This should give you a heads up to whether we will have an up or down day. Expect the violent swings to continue for some time. It is unlikely a clear macro direction will evolve for soon.

Levels today are  S&P  1640 1622 Euro 1.3330  1.3240

 

4 Comments

Noel

June 12, 2013

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Hello Peter,

Two things:

1. Is there a good site you would recommend for tracking daily movements in bond yields?

2. If i rates continue to rise leading to a fall in price of existing bonds and a sell off, and this leads to a sell off in stocks then where will the large investors, hedge funds etc invest their money? Will they just hold it in cash? Or will rising bond rates not make new issues of bonds attractive?

Thanks,

Noel

    Peter Brown

    June 12, 2013

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    Hi Noel.

    If you google 10 year Spain for example you will get a bloomberg page for that.
    same applies for other euro bonds

    10 year US you can get the future on your trading platform.
    When the market sells off it tends to liquidate everything initially.
    Eventually when things settle down they will re invest.
    How long this period takes is anyone’s guess.

    We trade it as it develops

    Regards

    Peter

Elmarie

June 12, 2013

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Hi Peter,

Do you think we have a down gap trade today? Or does the markets seem too strong?

Peter Brown

June 13, 2013

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Hi Elmarie,

Sorry I did not get back to you.
Hope you got the gap fill.

Peter