31st May 2012

Market Update:
UPDATE

How high the bonds?

Technical Fundamental

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How high the bonds?

Note US Treasur y 10 Year COMP Continuous 149 148 147 146 145 144 143 142 141 140 139 138 137 136 135 134 133 132 131 130 129 128 127 126 125 124 123 122 121 120 119 118 117 116 115 114 113

US TNOTE WEEKLY CONTINUATION CHART

The weekly chart of the TNotes shows that the market is being driven by two triangles. The major triangle has a minimum move up to 144. The small one has a measured move up to 137.50 or so. There looks to be a good deal more to come in this rally.

131-30 High 128-22.5 High from Dec 2008

128-01 H igh f rom Nov 2010

UPDATE Technical Fundamental

112-25.5 Low

112 111 110 109 108

^32

A M J J A S O N D 2009 M A M J J A S O N D 2010 M A M J J

A S O N D 2011 M A M J J

A S O N D 2012

A M J

J A

Euro Bund C ontinuous

134.77 H igh

119.86 Low

118.48 Prior High Piv ot

155 154 153 152 151 150 149 148 147 146 145 144 143 142 141 140 139 138 137 136 135 134 133 132 131 130 129 128 127 126 125 124 123 122 121 120 119 118 117 116 115 114 113

BUND WEEKLY CONTINUATION CHART

The clear bull structure of the Bunds is evident in the way the market has ratcheted better on the support from Prior Highs. The consolidation on the support from the latest Prior High at 134.77 is a triangle ascending - whose measureable minimum move is up as far as 148. The bulls remain in charge.

Disclaimer

N D 2008

A M J J A S O N D 2009

A M J J A S O N D 2010

A M J 109.66S O N D 2011 J A Low

A M J J A S O N D 2012

A MJ J A

109.66 Low

How high the bonds?

FUNDAMENTALS:
The major government Bond markets have, since the financial crisis/recession first broke, been consistent bull markets. Although there have been corrections when economic conditions periodically looked set to improve and equities rallied, bond yields in the US Treasury market, UK Gilt and German Bund, have hit successive new lows. And even when growth temporarily returned in the UK and Euro zone, bonds never really looked bearish. Now the UK economy is in recession, the Euro zone Ex-Germany is in recession and the US is experiencing a sub-optimal recovery sending bond yields even lower. The dynamic behind this extraordinary bond market price action is the Euro zone sovereign debt crisis. What began in Ireland and Greece, and initially looked manageable, has spread almost throughout the Euro zone. The UK, which isnt a Euro zone member, was forced to take the knife to a bloated public sector which threatened to bankrupt the country and send the UKs sovereign credit ratting plummeting lower, but because of the UK Governments decisive action, the Gilt is a safe haven asset with record low yields despite higher than hoped for inflation, weak economic activity and the Bank of England aggressively printing money; QE. In Germany Bund yields have collapsed. In fact the German government can currently borrow 2 year money for free. In the US the 10 year note is seen as a safe haven trade too even though the US runs a large public deficit with no real credible plan to reduce it, but as the Worlds largest national economy, by a margin, it is regarded as safe.

UPDATE Technical Fundamental

Disclaimer

How high the bonds?

FUNDAMENTALS: CONTINUED
The conditions that have brought about this crisis are all rooted in the Euro zone: too much public spending and low productivity. Despite several attempts to rescue Greece the problem is far from resolved and has now engulfed Spain. The Germans, as the de facto paymaster, have prescribed ever harsher doses of austerity as the cure. But all it does is shrink economic growth further, making it even harder for the likes of Greece to service even its drastically-reduced public spending/Debt. Unless the problem is finally resolved and soon, the Euro zone and maybe even the EU could tear apart. The impact would be felt far beyond the boarders of Euro zone/EU countries and could cause a financial system collapse and world recession like nothing seen in living memory. This fear drives investors into the safety of bonds issued by governments that are seen as truly sovereign, have their fiscal position under control. And , moreover, have the resources and financial/economic muscle to weather such a storm like the US . So how much higher can bond futures in the US Treasury, UK Gilt and German Bund go? In the current environment with no credible plan to solve the Euro zone crisis and with Spain entering dangerous territory analogous to where Greece required massive financial assistance that may be beyond the resources of the rescue fund, the sky could well be the limit. For sure, there will be corrections as news flows ease, but in the absence of a credible recovery plan these should be seen as buying opportunities.

UPDATE Technical Fundamental

UPDATE Technical Fundamental

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