Bonds speak volumes

Some bond charts address a burning question: is Friday’s rip-your-face-off rally for real? Technical patterns paint a bleak picture ahead, and suggest that eurozone investors remain deep in the woods.

Vanessa Drucker
Vanessa Drucker

Ten-year Italian government bond yields “broke out,” when prices vaulted in early July from a long stable base. (Technical analysts observe breakouts when securities emerge from a previous trading pattern, rising or falling beyond former highs/lows.) Moreover, you can draw a straight steeply rising yield trendline from August 19 to now. Or construct a channel on this interactive diagram of a 3X leveraged Italian bond exchange traded fund. Draw a lower line from September 9 through November 9, and an upper limit from October 12 through October 28. Despite Friday’s rally, the closing price at 14.29 remains ensconced within the ominous ascending channel.

No wonder, as Italy’s €1.9 trillion bond market, the third largest on earth, hit 7.4% last Wednesday. Foreigners, mainly large European banks, account for half of its funding. They have been dumping their bond holdings, to tidy up their balance sheets; meanwhile, they have been hedging debt positions by selling bond futures directly, making the Italian bond futures market balloon to €1 billion a day.

Investors are alarmed. The spreads between safer German yields and everyone else’s demonstrate very similar patterns. The patterns for Italian, French and Spanish spreads all clearly mimic the Italian bond yields, showing a July breakout with upward channels.

French government bonds, or OATs, could next come under pressure although that chart shows no comparable, catastrophic breakout – yet. But next year, France will struggle for €281 billion to meet debt and interest assuming rates remain near recent levels. French rates vaulted from 3.1% to 3.4% on Wednesday. Some of the move was attributed to a freak incident when Standard & Poor’s reportedly downgraded the country’s AAA rating. Oddly, despite fierce denials by the ratings agency, the yield remained high on Friday. Most likely the error was a “fat finger” accident, when a weary employee hit the wrong keystroke during a stressful week. Next week’s charts may clarify whether it really was an oops.