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).

Bund/BOBL Spread: Roll to June

Thinking About Summer

The IMC blog is holding a short position in the March Bund/BOBL spread that was entered at the equivalent of 31.93 on October 10th.  March contracts expire soon, so we’re going to roll to the June contracts.

The June spread closed at 28.94 on Friday, which is nearly a one and a quarter point discount to the March spread.  This puts the new spread right at a support zone on the weekly nearest-futures chart between the December and January lows of 28.91 and 29.09, respectively.  Once this support level is broken, there is nothing to stop the Bund/BOBL spread from descending to the next technical support level at a weekly Fibonacci .618 retracement at 26.13 (as measured between the 2015 low and the 2016 high.

euro-bund-euro-bobl-spread-weekly

Euro Bund Euro BOBL spread weekly

If the spread does not end its decline somewhere around this important support level, it may try to replicate the 9.40-point decline from last year’s record high.  If so, the next downside target will be at 24.74.

Trade Strategy:

Exit the hypothetical short March Bund/BOBL spread and simultaneously enter a short June Bund/BOBL spread at the market-on-close on Monday, March 6th. 

Bund/BOBL Spread: Roll With the Bear

Out With the Old, In With the New

The IMC blog entered a short position in the December Bund/BOBL spread at 31.81 on October 10th.  The December European treasury futures contracts are expiring soon, so it’s time to roll over into the March contracts.

We noted in September that the close below the rising 30-bar Moving Average on the nearest-futures weekly chart for the first time in a year could have marked the beginning of a multi-month decline.  That’s how it played out the last two times the spread cracked the weekly 30-bar MA.

euro-bund-euro-bobl-spread-nearest-futures-weekly

Euro Bund Euro BOBL spread (nearest-futures) weekly

Another bearish development occurred one month ago.  The Bund/BOBL spread closed back below the 2015 high of 30.58.  Remember the old charting rule: Old resistance, once broken, becomes new support.  Well, that support level gave out four weeks ago.  This confirms that the trend has indeed turned bearish.

Where To Now?

A Fibonacci .618 retracement of the move from the 2015 low to the 2016 high would take the spread down to 26.13.  That’s another three full points from here.

But that does not mean the decline has to stop at Fibonacci support.

If the current decline from the 2016 record high replicates the 9.40-point decline from last year’s record high, the Bund/BOBL spread would hit 24.74 before it’s all over.

The bottom line is that the spread continues to break layers of technical support and the next targeted support area is still a few full points away.  Therefore, it makes sense to simply roll the contracts over and stay short.

Heck, we may even be willing to add to the position if the right setup comes along!  We’ll keep you posted if we see something interesting.

Trade Strategy:

Exit the hypothetical short December Bund/BOBL spread and simultaneously enter a short March Bund/BOBL spread at the market-on-close on Wednesday, December 7th.  Initially, the spread will be liquidated on a two-consecutive day close above 34.30. 

Euro Bund/T-Note Spread: End of the Run?

At the Limit

Euro bunds have been outperforming the US 10-year notes ever since the end of the Great Financial Crisis eight years ago.  This is because the US economy has been outperforming the European economy.

You read that right.

Our economy has been doing better, but Europe’s 10-year treasury has been moving up faster than ours.  This is because Treasury prices are inversely correlated to Treasury interest rates.  So another way of saying this is that Europe’s interest rates have been dropping fast than ours.

But the charts suggest that this could be about to change.

euro-bund-t-note-spread-nearest-futures-weekly

Euro Bund T-note spread (nearest-futures) weekly

First of all, our nearly eight-year run in the bund/T-note spread is similar in duration to the bull market that started during the early ‘90s.  The spread bottomed at the end of the summer 1992 and topped in late spring of 2000.  A decline followed that lasted nearly two and a half years.

Secondly, the size of the current bull market is mammoth.  The 1992-2000 bull market ran the spread up 31 1/2 points from the low.  That was quite an accomplishment.  But our bull ran matched that gain two years ago.  A sizable correction followed soon after, but the next leg higher took it into record gains as our bull market has now put on 42 full points since the December 2008 bottom.

Third Time’s the Charm

On the daily timeframe, the nearest-futures Euro bund/T-note spread made some noteworthy tops around the 36.00 level this year: The spread peaked at 35.99 on March 1st, it peaked again at 36.33 on August 26th, and may have peaked once more this very week at 36.38 on November 28th.

euro-bund-t-note-spread-nearest-futures-daily

Euro Bund T-note spread (nearest-futures) daily

Based on the prior two tops, it stands to reason that the spread will at least descend to the 32.00 area again.  This is a good enough reason to take a stab at the short side of the Euro bund/T-note spread.

However, if this really is the end of the multi-year bull market, a sustained close below 32.00 could indicate that this is only the tip of the iceberg.  Based on history, it could be just the start of a multi-year bear market for the Euro bund/T-note spread.

Wash & Rinse

Now this is interesting.  The December Euro bund/T-note spread will expire in a couple of weeks.  The next spread to trade will be the March spread.  Usually, the March spread should be priced at a discount to the December spread to account for the carry-charge.  (This is because the interest rates on the further contracts are normally higher and the interest rate is inverse to the price).  But the March spread is priced at a premium of more than two and a quarter points over the December spread.  As a short seller, this is a gift.

The reason for the higher price in the March spread is because the March T-note is pricing in the expected increase in US rates.  The further divergence in monetary policy between Europe and the US is widening this spread.

march-2017-euro-bund-t-note-spread-daily

March 2017 Euro Bund T-note spread daily

The chart pattern of the March Euro bund/T-note spread is what has my attention, though.  This spread had a double top established between the August 26th high of 37.81 and the September 28th high of 37.81.  Once this resistance barrier was cracked on November 22nd, the spread had nothing to stop it from rocketing higher and the double top barrier became a floor of support.

This morning the March Euro bund/T-note spread is trading back below the old double top.  A close below this price would indicate a failed breakout attempt.  I call this a Wash & Rinse pattern.  Quite often, a failed breakout can lead to a sizable move in the opposite direction.  Therefore, a close below the August and September highs would be a short sale signal worth taking.

Trade Strategy:

Place a hypothetical order to sell one March Euro bund contract and simultaneously buy one March T-note contract if the spread closes below 37.81.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 38.81). 

Bund/BOBL spread: Stalking a Short Sale at Record Highs

Whiplash

The IMC blog initiated a short position in the December Bund/BOBL spread at 32.12 on September 9th.  It then only took two weeks for the spread to reverse from a two-month low of 31.89 to a new contract high.  This was quite a reversal on the daily timeframe.  Consequently, the position was exited with a loss at 33.90 on September 28th.

The spread also did an about-face on the weekly charts.  The first week of September was marked by a close below the rising 30-bar Moving Average for the first time in a year.  The prior two times this happened, the Bund/BOBL spread continued to decline for months following.

As it turns out, the third time was not the charm for the Bund/BOBL spread.

Time to Reload

Despite the trade loss, traders should be looking to reload their guns and setup for another shot.  On the weekly timeframe, the Bund/BOBL spread is merely returning to where it previously peaked at an all-time high in late July.  A break back below the September low would put the spread back in a bearish position as it would both be below the weekly 30-bar MA again and triggering a Turtle-style (Donchian band) breakout to the downside.

euro-bund-euro-bobl-spread-30-bar-ma-weekly

Euro Bund Euro BOBL spread (30-bar MA) weekly

Furthermore, a break of the September low after the recent breakout to new highs could accelerate a downward move as anyone who went long on this breakout would likely get their liquidation parameters triggered.  We want to be short if that happens.

Trade Strategy:

The blog will work a hypothetical order to short the December Bund/BOBL spread on a close below the September low of 31.89.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 33.90). 

Bund/BOBL spread: Shift to the December Contracts

Buying More Time

The IMC blog is working orders to short the September Bund/BOBL spread.  We’ve been doing this for months, actually.  The spread has continued to climb, so we have just patiently waited for a trend change to materialize before we throw our hat in the ring.

September treasury contracts are expiring soon.  Therefore, we need to recalibrate our short sale parameters and start stalking the December Bund/BOBL spread.

It appears that the December Bund/BOBL spread has found stiff resistance as soon as it crossed the 33.00 level.  This spread peaked at 33.24 on July 5th and backed off.  It then posted a new contract high of 33.41 on July 29th, but quickly retreated again.  Then the spread made it all the way back up to 33.36 just this past Friday.

December Euro Bund Euro BOBL spread daily

December Euro Bund Euro BOBL spread daily

On the one hand, the fact that the spread just can’t get past this barrier makes it tempting to short against.  On the other hand, the more a spread tests support/resistance, the more likely it is to eventually break it.  Therefore, we are inclined to wait for a break of support before we get short.

The December Bund/BOBL spread made its low for the month at 32.51 on August 2nd.  It got awfully close on August 16th when it dropped to 32.55, but the spread recovered again and went on to make new highs for the month.  Therefore, the IMC blog will consider a break of these similar lows a support breach worthy of an entry signal on the short side.

Weekly Confirmation

On the weekly timeframe, we’ve been monitoring the rising 30-bar Moving Average for support.  The spread has closed above the weekly 30-bar MA every week for a year straight now.  A close back below would signal a bearish trend change on this timeframe.

Recall what happened when the Bund/BOBL spread closed below the weekly 30-bar MA and triggered a bearish trend change in 2013 and 2015.  The decline continued for months afterwards.  We want to make sure we are swimming downstream with the tide when that happens again.

Euro Bund Euro BOBL spread weekly

Euro Bund Euro BOBL spread weekly

Coincidentally, the weekly 30-bar MA is currently located at 32.65.  When the December spread becomes the nearest trading month this week, then a break of the current August low will also put the Bund/BOBL spread below the weekly 30-bar MA.  This could create a one-two punch by way of a technical support break on two different timeframes.  It’s hard to get a better setup than that.

Trade Strategy:

Cancel the current hypothetical order to short the September Bund/BOBL spread and replace it with a new hypothetical order to sell one December Euro bund contract and simultaneously buy one December Euro BOBL contract if the spread closes below the current August low of 32.51.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 33.41). 

Bund/BOBL spread: Short Sale Parameter Revision

Trailing Along

For the last several months, the IMC blog has been stalking the Bund/BOBL spread for a short sale.  Basically, we’ve been trailing the spread with a contingency to get short on a break of a prior month’s low.

It hasn’t happened yet.

September Bund BOBL spread daily

September Bund BOBL spread daily

Trading for the month of July ended today.  The September Bund/BOBL spread finished with a new contract high.  A mid-month correction left an obvious price support area on the chart at the July low of 32.54.  Therefore, we are going to raise the short sale parameters to enter on a break of this correction low.

The Bund/BOBL spread is rocketing higher as negative interest rates in Europe continue to propel the treasury spreads.  Once the “rocket” runs out of fuel, though, a significant reversal is likely.

One way we may know that the fuel is gone is when the spread breaks below technical support on at least two timeframes.  The break of the mid-July low would do the trick on the daily timeframe.

On the weekly chart, the rising 30-bar Moving Average may be the trip switch to keep an eye on.  When the Bund/BOBL spread closed below the weekly 30-bar MA in 2013 and again in 2015, it continued to trend lower for months afterwards.

Bund BOBL spread weekly (30-bar MA)

Bund BOBL spread weekly (30-bar MA)

Therefore, a close below the weekly 30-bar MA for the first time since August of 2016 would confirm that a downtrend is in motion.  Once that happens, we will likely be positioned on the short side and looking to add.

Trade Strategy:

Cancel the current hypothetical order to short the Bund/BOBL spread and replace it with a new hypothetical order to sell one September Euro bund contract and simultaneously buy one September Euro BOBL contract if the spread closes below the July low of 32.54.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 34.26). 

Bund/BOBL spread: Trade in September

Getting More Time

We’re about at the halfway mark for the month, so traders will soon start rolling out of their June Treasury contracts and into the September deliveries.  Since we have not yet been elected on our contingency to short the June Bund/BOBL spread, we’ll go ahead and switch to working orders for the September spread. That way, we won’t have to worry about rolling the position until the end of summer.

You may recall that our parameter for getting short was to wait for a break below price support at the similar lows of mid-February and mid-March at 30.63 and 30.61, respectively.  This was confluent with the weekly 2015 high of 30.58.

Well, the spread got awfully close to that point in late April and then took off again.  This confirms that it is an important price level to monitor.

The September Bund/BOBL spread is trading at a discount of nearly two full points to the June spread, so it is a lot closer to the weekly 2015 high than the June spread is.  When it becomes the nearest-futures spread in a few weeks, the pressure will get turned up.  Either the September spread needs to take the baton from the bull market and run higher or else it could indicate that the run is over.

September Euro Bund Euro BOBL spread daily

September Euro Bund Euro BOBL spread daily

The March low of 28.66 and slightly higher April low of 28.81 set key support on the daily timeframe for the September Bund/BOBL spread.  Therefore, we will use a break of this level as a sell signal.

A test or breakout above the current contract high –especially after the September contracts become the front month contracts– could provide us with a setup to get short at higher prices.  A Wash & Rinse sell pattern would certainly be nice.  If so, we will definitely be posting something.  Until then, Schönes Wochenende!

Trade Strategy:

Cancel the hypothetical order to short the June Bund/BOBL spread.  Replace it with a hypothetical order to sell one September Euro bund contract and simultaneously buy one September Euro BOBL contract if the spread closes below 28.66.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 31.26).