Eurozone uncertainty keeps bunds climbing

GERMAN bunds made gains across the curve yesterday as expectations of further US quantitative easing (QE) increased and the Eurozone producer price index (PPI) indicated a lack of inflationary pressure in the pipeline. Over the last few weeks the German bund price has gradually travelled upwards reaching a value of 13,182.5 yesterday at 7:45pm (see chart). But can the Eurozone’s engine continue to provide low yields and rising prices when Ireland and Greece see their yields rising?

Harvinder Sian, a rates strategist at RBS, says yes and that there is plenty of potential for a rally higher. In fact, for as long as the outlook for the Eurozone periphery is uncertain and QE is on the cards for the US and the UK, the German bund will act as a safe haven.

The bund has matched the US and UK bonds’ falling yields, yet manages to boast the lowest yield because its economic outlook seems surer. This could be exacerbated on Friday if the US’s non-farm payroll data is negative.

RBS’s Sian says that unless the US Federal Reserve decides to call off QE or the Chinese suddenly start selling US bonds we are unlikely to see a drop in the bund price because the market has priced in the current yield expectations. As these events are unlikely, traders will find going long on the bund ever more appealing.

But be warned, any news of uncertainty in the troubled parts of the Eurozone will provide lots of volatility over the next three months. Traders should place their stop losses low in order not to get stopped out. Traders can see how this is happening already from how the bund fell to 12,983.1 on 13 September 2010, but has climbed back up to today’s highs. This suggests that placing a stop loss as low as 50 or 100 points below the bund’s current price while, a little risky, could be wise.

Traders considering positions on the other German bonds such as the bobl, buxl and schartz should relax in the knowledge that -- if only trading for the quarter -- there is little difference between them. Traders should probably still opt for the bund because David Jones of IG Markets says traders benefit from bonds carrying high volumes since they provide greater liquidity and tighter spreads.

CFD traders should be bullish on the bund for the quarter, but expect a bumpy ride.