30th January - The bullish Bund
02 February 2015
TECHNICALS:
Weekly Bund chart
The rally is powerful without significant pause since early December.
Daily Bund chart
The resurgence since the attempted pull-back in mid January has been remarkable.
FUNDAMENTALS:
The recent election in Greece has added a new unwelcome uncertainty to the Euro zone. The ink had barely dried on the ECB’s decision to begin a substantial QE program intended to drag the Euro zone economy out of deflation and kick start a solid recovery, when Greece elected a left wing government with a mandate to renegotiate the terms of the EU/IMF/German bail out.
Although the new Greek PM has said his country will not default on its debts, he has made it clear the terms of the rescue must be eased, so as to end the years of crippling austerity imposed on Greece as a condition of the rescue package.
The Germans though are equally insistent that the agreement must be adhered to; a period of fraught relations between Greece and her creditors now looks likely.
But if Greece is not going to default, and the Germans won’t ease there ultra orthodox stance, meaning no more rescue cash if Greece stops implementing the terms of the deal, what does this mean for the Euro zone, the Euro and Euro zone bond markets?
In a nut shell : great uncertainty This will further weaken the Euro and potentially undermine the ECB’s efforts to reflate the economy.
For bond markets the outlook seems clear. Greek government bond yields must surely rise. Moreover the government bond yields of Spain, Portugal and Italy could also rise if a new crisis develops and investors begin once more to fear a break up of the Euro zone.
Greece is not the only country in the Euro zone that received a bailout, Spain and Portugal were recipients too and France and Italy are yet to implement budget cuts and reform measures previously agreed with the EU as a condition of their own financial rescue deals.
Much like Greece, austerity has caused hardship in those countries and there are political parties in those countries campaigning on similar policies to those of the new Greek government.
If Greece is successful in altering the terms of her deal, Germany in particular is worried others will demand similar forgiveness and there in lies the reason for German “intransigence” they fear an opening of the flood gates.
For the Bund the outlook is clear: it is bullish. No matter which scenario plays out the Bund remains a strong Bull market.
If the Greeks back down, then all eyes are once more on the Euro zone economy and QE which supports the Bund.
If Greece gets her way and the others seek similar treatment the Bund is a buy.
And if as is likely a stand off develops leading to heighten uncertainty, greater Euro weakness and a new Euro zone crisis, the Bund is still a buy.
In summary, there is no set of circumstances likely to emerge in the short/medium term at least, where selling the Bund would make sense.
Next story:
9th February - Oil, a rally or a correction 
Previous story:
29th Jan - Looking For Next Support in Cocoa