Blowing Bund Bubbles

What’s your favourite type of trade? Personally, I like big picture moves – a trade I can ride and ride. These number highly in the most profitable trades I’ve ever made. So I favour break-outs, reversals, and especially, bursting bubbles. That’s why I’m watching German 10 year bonds (Bunds) like a hawk.

In fact, the relentless market focus on Europe has German bond markets on most traders’ radar, noted in this post from June – “Don’t Mention the Bunds”

While the predicted falls were smaller than forecast, and Bunds have since rallied, the record price levels are still suggesting a bubble to me. Here’s the yield (interest rate) chart:

German 10 Year Bonds – Daily (Yield)

Source: Bloomberg

As you can see on the chart, the yield appears to have found a double bottom just below 1.20%. This makes sense to me – the ECB bond buying plan announced last week, if implemented, will mean a higher cost of borrowing for Germany as a direct result of lower cost of borrowing for nations like Italy and Spain.

I’m exercising some caution ahead of the German Constitutional Court ruling on the European Stability Mechanism due on Wednesday. If the court rules the ESM unconstitutional, we’re likely to see selling of Italian and Spanish bonds and buying of German bonds. However, if it gives the ESM a tick, its likely to be “game on”.

Bunds are traded by price. Each contract has a face value of 100 Euros.

German 10 Year Bonds – Daily (Price)

The chart is looking very interesting. Lower peaks are suggesting weakening demand. For mine, a breach of the support at 141.05 will signal the bursting of the Bund bubble.

Why is this so important? Here’s the longer term chart:

German 10 Year Bonds – Weekly (Price)

You can see the potential if this is a trend reversal. I’d expect moves back towards 1.34, and if this trend is established, possibly 1.20. There are two approaches I’m looking at:

Fundamental – SELL Bunds on a German court ruling the ESM is constitutional

Chart based  – SELL Bunds on a breach 0f 1.41

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
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3 Responses to Blowing Bund Bubbles

  1. Raj DAS says:

    This have become a good trade. I had also bought put options which are in profits. Thanks Michael.

    • Raj says:

      After the FED Announcement, should the Bunds increase or decrease? I see the prices now at 140.21. Cant understand the logic of the rise, as all pointers were towards a fall. Is it the short selling cover up merely?

      • Hi Raj – my view? while QE3 is supportive of assets generally, it will not support the Bunds, given their recent favoured status and the likely rotation of investors away from German bonds into other, higher yielding issues. I’m looking for further falls.

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