Bund/BOBL spread: Exit June Contracts

Move to the Sidelines

The IMC blog is holding a short position in the June Bund/BOBL spread that was originally entered on October 10th.  Due to rollovers, the entry price is the equivalent of 30.73.

The nearest-futures Bund/BOBL spread has been stuck in a consolidation zone for the last few months.  Initially, the trading range was defined by the price range that followed the bounce in the second half of December.  But a failed breakout above the range in late February and a failed breakout below the range in early March reset those boundaries.  After that, it’s been about as exciting as watching paint dry.

Bund BOBL spread (nearest-futures) daily

Bund BOBL spread (nearest-futures) daily

The September spread is priced more than a full point higher than the June spread and is currently trading higher than the late February price peak, basis the nearest-futures.  Therefore, the expiration of the June contracts will cause the nearest-futures chart to show a breakout above the top of the range.  This is bullish price behavior and not a good development for bearish bets on the European yield spread.  On this basis, the blog is going to simply exit the June spread without entering a September spread.  In other words, we’re not rolling over.

Since at least December, the September Bund/BOBL spread has made a series of higher lows.  A double top that was established at the January and February highs was surpassed at the end of April below a pullback occurred into the first half of May.  This is bullish.

The spread has been in an upswing since the May 9th correction low was established 29.95.  So far, three-quarters of the pullback has been recovered.  Things still look good for the bull side of the spread.

September Bund BOBL spread daily

September Bund BOBL spread daily

A break of the May low would throw a wrench in things as it would put the nearest-futures spread back into the trading range and also crack near-term price support for the September spread.  This would be a good reason to reenter a short position.

Trade Strategy:

Exit the hypothetical short position in the June Bund/BOBL spread at the market.  Work a hypothetical order to short the September Bund/BOBL spread on a close below the May low of 29.95.  If filled, liquidate the position on a two consecutive day close above the contract high that precedes the entry (currently at 32.15).

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