US Treasurys and other major bond markets saw enormous demand in the wake of the United Kingdom’s vote to leave the European Union.
Buying in the weeks following the vote pushed bond yields across much of the developed world to record lows. Here in the US, the 10-year yield broke below 1.38% for the first time ever while the benchmark yields in Germany and Japan hit -19 basis points (bps) and -30 bps, respectively.
But recently, yields have started to climb, as bond prices have fallen.
The US 10-year yield is back up to 1.70% and, in Germany and Japan, 10-years have reached 3 bps and -4 bps, respectively. And now, according to a research note sent out on Thursday by Societe Generale’s technical analysis team of Stéphanie Aymes and Loic de Galzain, the biggest bond markets in the world are “at the mercy of a correction.”
In their fourth quarter 2016 roundup entitled “Global Market Prospects: What the Charts Say!,” the team warns the most recent US Commodity Futures Trading Commission Commitment of Traders data shows net non-commercial futures positioning is approaching the 2012 highs and that a “corrective pullback” looks overdue.
And the bond market has seen some other warnings signs pop up lately.
Foreign buying has slowed. As Credit Suisse noted back on August 23, it has become more expensive for foreign buyers to hedge their positions because of “the increased premium placed on dollar funding (evidenced in the cross- currency basis swap market) as well as the slight increase in pricing for the near-term potential of further policy rate divergence.”
As for how hig yields can rise, Societe Generale doesn’t specifically say. However, the notations on the chart above show it appears the team believes a breakout above 1.75%/1.77% sets the stage for a move into the 1.90%/2.00% region over the near-term.