how high the bonds 31st may 2012 (1)

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  • 7/31/2019 How High the Bonds 31st May 2012 (1)

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    Authorised and regulatedby the FSADisclaimer

    Market Update:UPDATE

    FundamentalTechnical

    31st May 2012

    How high the bonds?

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    UPDATE

    Fundamental

    Technical

    Disclaimer

    M J J A S O N D 2009 M A M J J A S O N D 2010 M A M J J A S O N D 2011 M A M J J A S O N D 2012 A M J J A

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    ^32

    128-01 High from Nov 2010

    112-25.5 Low

    128-22.5High fromDec 2008

    131-30 High

    NoteUS Treasury10 Year COMP Continuous

    How high the bonds?

    US TNOTE WEEKLYCONTINUATION CHART

    The weekly chart of the TNotes showsthat the market is being driven by two

    triangles.

    The major triangle has a minimummove up to 144.

    The small one has a measured moveup to 137.50 or so.

    There looks to be a good deal more tocome in this rally.

    BUND WEEKLYCONTINUATION CHART

    The clear bull structure of the Bundsis evident in the way the market hasratcheted better on the support fromPrior Highs.

    The consolidation on the supportfrom the latest Prior High at 134.77is a triangle ascending - whosemeasureable minimum move is upas far as 148.

    The bulls remain in charge.

    D 2 008 A M J J A S O N D 2009 A M J J A S O N D 2010 A M J J A S O N D 2011 A M J J A S O N D 2 012 A M J J A

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    118.48 Prior High Pivot

    .

    134.77 High

    119.86 Low

    Euro Bund Continuous

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    UPDATE

    Fundamental

    Technical

    Disclaimer

    FUNDAMENTALS:The major government Bond markets have, since the financial crisis/recession firstbroke, been consistent bull markets. Although there have been corrections wheneconomic conditions periodically looked set to improve and equities rallied, bond yieldsin the US Treasury market, UK Gilt and German Bund, have hit successive new lows.

    And even when growth temporarily returned in the UK and Euro zone, bonds never reallylooked bearish. Now the UK economy is in recession, the Euro zone Ex-Germany is inrecession and the US is experiencing a sub-optimal recovery sending bond yields evenlower.

    The dynamic behind this extraordinary bond market price action is the Euro zone

    sovereign debt crisis. What began in Ireland and Greece, and initially lookedmanageable, has spread almost throughout the Euro zone. The UK, which isnt a Eurozone member, was forced to take the knife to a bloated public sector which threatened tobankrupt the country and send the UKs sovereign credit ratting plummeting lower, butbecause of the UK Governments decisive action, the Gilt is a safe haven asset with

    record low yields despite higher than hoped for inflation, weak economic activity and theBank of England aggressively printing money; QE.

    In Germany Bund yields have collapsed. In fact the German government can currentlyborrow 2 year money for free.

    In the US the 10 year note is seen as a safe haven trade too even though the US runs alarge public deficit with no real credible plan to reduce it, but as the Worlds largestnational economy, by a margin, it is regarded as safe.

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    FUNDAMENTALS: CONTINUEDThe conditions that have brought about this crisis are all rooted in the Euro zone: toomuch public spending and low productivity. Despite several attempts to rescue Greece

    the problem is far from resolved and has now engulfed Spain.

    The Germans, as the de facto paymaster, have prescribed ever harsher doses ofausterity as the cure. But all it does is shrink economic growth further, making it evenharder for the likes of Greece to service even its drastically-reduced publicspending/Debt.

    Unless the problem is finally resolved and soon, the Euro zone and maybe even the EUcould tear apart. The impact would be felt far beyond the boarders of Euro zone/EUcountries and could cause a financial system collapse and world recession like nothingseen in living memory.

    This fear drives investors into the safety of bonds issued by governments that are seenas truly sovereign, have their fiscal position under control. And , moreover, have theresources and financial/economic muscle to weather such a storm like the US .

    So how much higher can bond futures in the US Treasury, UK Gilt and German Bund go?

    In the current environment with no credible plan to solve the Euro zone crisis and withSpain entering dangerous territory analogous to where Greece required massive financialassistance that may be beyond the resources of the rescue fund, the sky could well bethe limit.

    For sure, there will be corrections as news flows ease, but in the absence of acredible recovery plan these should be seen as buying opportunities.

    How high the bonds?

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