Wednesday, February 4, 2015

JGB Leading Higher Treasury Yields

In reply to my quick note that the TY looked sick, one of the economists that read some of my work suggested I take a close look at the JGBs, suggesting that Treasuries may have more room to fall.  Enclosed is a chart of the JGB dating to January of ’14 and it shows a ‘diamond top’ I chose to draw.  We see a break lower in the last two days and though prices firmed from lower opening levels in both instances, the daily finish has continued lower.  

Generic JGB yields nearly doubled since January 19th from 20.1 basis points to a current 38.1 basis points.  Additionally, it is interesting to note that German bund yields for the first time in history are below Japan JGB yields.  The German Bund currently yields 3.3 bps less than the JGB. 

So, does a jump in JGB yields suggest that Treasury yields are due to climb?  Maybe not of itself, though you would have heard many talk of the way the U.S. has been veering toward a Japan style period of a deflationary trap.  If we can imagine conditions exist for higher JGB yields, then those who have had concerns that Japan is exporting deflation our way may lighten up on that rhetoric.

In any case, the JGB is a difficult market to trade.  You can imagine that even bearish minded traders encouraged by repeated lower opening levels are frustrated by day’s end with slight recoveries.  There is a window (gap) between 146.95 and 147.14.  If that window is closed with a settle below 146.95, we should expect further losses.  Until such time, we would suggest this level be used as support.  

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