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Bond of the Week: 11 April 2012

Gilt benchmark back up at the highs..............

    

The last few weeks have seen both economic data and sentiment run hot-and-cold. Weak employment data from the US, combined with a resurgence of concerns on the European debt situation have seen a "risk off" rotation out of equities. The higher quality government bonds - Bunds, Gilts and Treasuries have benefited, with the former putting a particularly strong showing.

A misanthropic colleague of mine once remarked that financial markets move in the direction that causes the greatest amount of pain for the greatest number of people.  He may have point; March saw a surprising amount of commentary heralding "the end of the bond market". No doubt there were many shorts onboard.

Looking at the chart, I would observe that the speed and vigour with which Gilts, Bunds and Treasuries have rallied shows that the bond markets can be a dangerous place to be a short-seller. As an investor, I naturally approach the bond market from a "long only" approach, but many people choose to trade the price action, be they hedge fund managers or private CFD and spread-bet players. What now should be the plan of action? 

My view: I am not sure that Gilts will manage to hold the new highs. Such a move would entail the yield on the 10r benchmark dropping (and remaining) below 2%. Given that the economy is recovering, at least to some extent, such low long-term yields seem incongruous. Today’s session has seen the June contract give back some of its gains, although technically it is maintaining the break above 116. Traders should look to short on the move below this level, with a caveat of keeping a firm stop at Tuesday’s intraday highs (116.74). Watch to sell.

Mark Glowrey

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