Bond Yields Will it work this time

Reports of rising bond yields are ubiquitous these days.

The argument that US GDP will grow faster in 2013 rests on expectations that the US will avoid the $600 bn fiscal cliff courtesy of an eventual resolution regarding a higher debt ceiling and that the agreed upon cancellation of the Bush-era tax cuts on wealth individuals will not hit the economy.

Another argument favouring yields is that further gains in US and global equity indices will trigger a positive transmission mechanism into the economy from corporate spending and household wealth.

There are also inflationary concerns as: the Fed maintains asset purchases until unemployment nears 6.5% (from the current 7.8%); Japanese PM Abe issues a supplementary budget of yen 12-13 trillion—higher than the anticipated yen 10 trillion and requests the Bank of Japan introduces unlimited bond purchases to double its CPI target to 2.0%; and the Eurozone economy benefits from falling periphery bond yields to the extent of further boosting equities alongside bund yields.

The combination of “positive growth” factors and inflationary concerns cropping up in H2 is likely to bring about the transition of supportive yields towards a full fledged rally.

The technical picture for yields looks increasingly bullish. The three-year trendline is in the process of being broken, which will likely give way to the 100-week moving average—near 2.19%. Moving into the monthly chart, a more important target is noted at 2.40%, which is the previous support (Oct 2010) becoming resistance (Oct 2011 and Mar 2012). Once these levels materialise, the road opens towards the six-year trendline resistance near 2.60%. This would imply a 100% increase from the July lows of 1.37%. Support rests at the six-month trendline of 1.64%.

For currency traders, these developments are especially negative for the yen due to Japanese investors’ appetite for yield. We expect the next phase of aggressive yen weakness (and new phase of yield gains) to take part later in April when the BoJ governor Shirokawa’s term expires, allowing PM Abe to appoint his own man to conduct a more “inflationary” policy. USD/JPY at 97 and EUR/JPY at 123.00 are realistic targets for early Q2.

For a look at our previous Yen-Yields calls, please view here, here, and here.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.