Friday, May 29, 2015

Bund Signals Heightened Volatility Alert

In mid-April, we warned of a turn in rates when the Bund yield was near zero (See Apr 21; ‘Bund Taking U-Turn at Zero Yield?’).  The candlestick pattern that precipitated that call was a ‘double doji’ which points to heightened indecisive trade and a potential for forthcoming volatility. 

In the last two sessions, a similar pattern has emerged.  The opening and closing prices on Wednesday were both 154.71 while on Thursday they were 154.90.  This is unusual even though it has happened twice in less than two months.  The source of this indecision is likely both the unfolding developments in Greece and the uncertain prospects for recovering growth. 

Finally, we taken note of the declining open interest during the advancing price action over the last week or so.  Generally speaking, we discount trending price action that is accompanied by declining open interest; thinking of it as less fuel to stoke the fire.  Importantly, we understand the volume of corporate issuance was near Eur41 in May, relative to a more normal level of Eur 13bn.  The declining open interest of late may be attributable to the reduced issuance, just as the increased issuance earlier led to open interest growth in early May.  

The bottom line here is that the Bund is primed to make some volatile movement(s).  It is not clear from the ‘double doji’ which direction the movement(s) will be.  The Bund is approaching the 50% retracement of the 9 point decline from 160.69.  The recovery has been tentative to date.  We will soon discover whether the advance has legs.    


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