The Euro Bund/T-note Spread
On August 24th the blog initiated a short position in the December Euro bund/T-note spread at 27.36 (premium bunds) when the Euro bund closed at 155.99 and the T-note closed at 128-20. The break below the early August low lured us in after the spread probed resistance between a Fibonacci .618 resistance line and the 100-day Moving Average and then rolled over.
On October 26th the spread was liquidated at 29.00 (premium bunds) when the Euro bund closed at 157.59 and the T-note closed at 128-19. This resulted in a loss of approximately -$1,800, not including commissions.
Fundamentally, the rally to new multi-month highs was due to the divergence in monetary policy. With inflation in the Euro zone well below the target level of 2%, the odds are increasing that the ECB will push the deposit rate even further into negative territory from -0.2% to -0.3%. At the same time, the only debate about US interest rates is on the timing of when the Fed will hike, not if they will do it.
The Euro bund/T-note spread blasted its way past price resistance at the July top. This also put it well above the Fibonacci .618 resistance line. Currently, there is nothing to stop it from adding a couple more points and returning to March 3rd the record high of 31.53 where it could form a double top. If the spread makes it up to somewhere close to this level, we will be watching for a potential reversal pattern to take another crack at the short side.
A sustained close above the March high, however, would put the Euro bund/T-note spread in uncharted territory again. There’s no telling how far it can run from there. Don’t fight the trend.