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Bond of the Week: Gilt yields near the top of the shorter term range.
Bond of the Week, 19 December 2006: Gilt yields test the top of the short term range
When tracking the performance and behaviour of bonds over longer time periods, experienced analysts will chose to track benchmark yields, rather than price performance. Why, you may ask, should this be so? The reason is simple enough; benchmark yield charts compare like with like, while the nature of any individual bond will change over time. To put it simply, after three years, a ten year bond is a ten year bond no longer! As the bond rolls down towards maturity, its characteristics will change and the yield and price may be influenced by the supply and demand situation prevailing on that part of the yield curve.
This brings us to the chart of the yield of the ten year benchmark Gilt (see chart, top right). It is evident that there are two ranges at play. One is the longer-term range between 4% and 5.25%, whilst the other is the more recent congestion seen between 4.5% and 4.75%. At present, the yield on the ten year has edged up towards the top of this narrow range. Remember, rising yields equate to falling prices, and this potential resistance corresponds to price support
Would we trust this potential price support level? Not completely, not least because we have yet to see a demonstration of support from the futures market, which at the time of writing is down another 17p at 108.30. Shorter-term traders may consider an exploratory long side venture, hoping for a bounce with a stop level held close below.
Longer term investors will watch the outcome of these events closely. Should we see a break of support, Gilt yields may be heading up to 4.9-5%.
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