This sounds a bit disconcerting from Charlie Diebel at Lloyds TSB on Wednesday:
One of our key comparative metrics is flashing Red this morning and that is in the 10yr Bund/T-Note spread. Our models have for some time suggested that 10yr yields in the US were too high relative to their European counterpart due primarily to the recovery in confidence in the eurozone while in the US consumer confidence remains subdued.
As such one might not dwell too long on the recent outperformance by the US 10yr with yields currently a mere 6 bp over their European counterparts. However a look at the weekly charts highlights that there is a relatively clear head and shoulders formation which would suggest the US outperformance could go significantly further with a measured move in the 50bp region.
The problem for Diebel, though, is that outperformance of the US note is inconsistent with Lloyds’ macro view, which sees the US running something of an inflationary risk.
The real concern in that circumstance, he says, is thus the prevailing condition of 10-year US Treasury notes having substantially lower yields than their European counterparts. It’s “generally a signal of a traumatised market condition”, he says.
As Diebel notes:
The last sustained period where T-Notes traded through Bunds was in 2008/09 and prior to that in 2002/03 and the big bond sell off in 1994. While we have more than our fair share of geo-political concerns hitting the wires of late, if the signal being generated in the 10yr spread now is correct, it would suggest both a directionally positive bias will prevail in bond markets and that a fairly protracted risk off phase could be at hand. This would make keeping the yen weak difficult for policy makers and likewise would put any upside potential for equity markets in doubt. It’s not our call but the warning is there. Maybe some tail risk protection is advisable still even after all the recent events in MENA and Japan.
In technical analysis a head and shoulders pattern is usually understood to be a very reliable reverse indicators. If you believe technical analysis, that is.
Related links:
Fallout from a flock of black swans - FT Alphaville
Treasury five-year yields touch week high… – Bloomberg