Technical Analysis : KTB 10 Yr Future, It's time to sell bonds ?!

Below chart is about the price of Korean treasury bond future with 10 year maturity on a weekly base. It signals it's time to sell the long-end tenor bonds as considering Korean rates often tend to lead the global bond markets, albeit I consider the time horizon for this as by the end of this year.

We could find some hints in below weekly candle chart with

1) In a red circle, we could see the island gap in this weekly chart ! It's consist with one positive candle and another negative candle, respectively. Surely, however, because it's before the end of this week, we could not believe this pattern yet. But, other 2 rationales should underpin the short view.

2) MACD is drawing a divergence.

3) A lag span is matched with previous inflection point seen in a green circle.

So, shortly we may be cautious the possible bond bear market.
Moreover, this could be in line with the risk appetite, especially strong credit products in bond markets. Therefore, we should plan to buy corporate bonds against treasury bonds moderately...

TPP is a headwind for China via BNP Paribas

via BNP Paribas, TPP would be a headwind for China because of...

1) Exports... due to low or zero tariffs. China exports to the TPP12 countries made up 35.5% of total exports in 2014. And exports to TPP12 grew 12.8% between 2004 and 2014, against 14.7% for the whole countries.

2) FDI. Exports of foreign funded enterprises were USD 1.07 tn, making up 46% of the aggregate exports in 2014.

3) Production transferring and relocation...

Ma Jun, the chief economist of PBOC Research Department, estimates a 0.5% of GDP equivalent opportunity cost loss per annum during the 4-year transitional period if China cannot join in.

Consequently, however, TPP could push China Reform...!

Shanghai Composite Index : New Cycle Starts ?

SHCOMP index showed Elliot wave consist of 5 up cycles and 3 down cycles ended at the end of August. And the new cycle seems to start with 3 bottoms raising troughs moderately.

However, the negative cloud is ahead of this and late August down gap would be a strong resistant point within a few period... Moreover, turnaround of longer term moving average line signals the end of upward trend...

Short-term robust movement would be likely.
But, in mid term, it should not be continued...
Nevertheless... I may start to buy corporate bonds, a kind of risk assets, tactically...

Global Agg Bond Investment Strategy at a glance with a Chart Pack

During last 2 years, the hot prospect in developed market was divergence of monetary policies.

But, under slower or contracted manufacturing activities and consumers' sentiment about future's economy, the possibility of Fed's fund rate hike went far away.

So, USD bonds could outperform against other regions.

Maintain quite overweight position on USD bonds for a main alpha strategy.

UST 10 yield versus Bund 10y yield

With expected dovish stance of U.S. monetary policy, oil price could be underpinned and showed somewhat robust movement. EM currency and global equity markets turned stronger followed this risk appetite.

Especially, with chart analysis, JPY would be more attractive currency to buy as additional BOJ's easing tools seems restricted ahead of the election next year.

USD/JPY seems to turn around to strengthening JPY

USD/KRW moved lower as expected previously

Meanwhile, Euro is difficult to forecast...it seems less attractive than JPY...

Euro Weekly : Strong resistance of a thick negative cloud

But, convergence of M.A. lines is going to explosion toward up or down

JPY/KRW weekly : Trying higher under burden of high MACD...

On the other hand, strong JPY comes with tumbling risk asset price frequently...
But, while recent weak USD leads risk asset rally including emerging market and commodity prices, CRB index seems to maintain to gain further on weekly chart... and SHCOMP index would be underpinned within current level... whilst China CDS premium could move higher again as a mixed signal... So, I am somewhat cautious to open FX position to long JPY for now...

CRB Index Weekly : Trying to move upward more

SHCOMP index weekly : signals turn around to upside...

China 5Y CDS Premium : underpinned by a cloud? return to higher?

These mixed signals make me frustrated especially with credit position.
If U.S. equity price rises further, widened credit spread could return to narrow. Although I overweight corporate bond position, if include government-related bonds and the securitized as whole credit position, I am short against benchmark now...
On the other hand, the spread between corporate bond and mortgage widened to the highest level since 2011. So, I plan maintain to long corp. bond against mortgage... and consider to add this position by changing mortgage bond to corp. bond further...

S&P500(inverted) and Corp. OAS : what is under-valued?

Corp. bond seems more attractive than mortgage

Duration and yield curve strategies are more difficult to suggest... On yield curve, 5s30s seems stopped at a recently highest level with MACD divergence. However, MACD divergence has betrayed me often and it's somewhat cautious to change to flattener position ahead of changing cloud from negative to positive. Moreover, long moving average such as 200 days turns to slightly upward.
So, I bought UST 30y slightly today to cover a big short position in longer tenor as maintain steepener and short duration position. I should consider further about this next week...

MACD divergence in 5/30 UST Spread...ahead of changing cloud

German Bund 30y seems prepared to go higher after convergence of moving average lines. Underpinning 200 days average and slightly upward MACD signal upward direction. I continue to short on duration in Euro area.

UST 30 year chart seems similar with Bund. So, I maintain short duration in U.S. as well.

About inflation bonds, the breakeven in 10 year tenor will likely move toward higher additionally. This is contrary to my skepticism about possible high inflation toward the end of this year because recently CPI and PPI in Euro area and Korea were very disappointed lowering the overall price level which is limit for upside at the end of this year...
But, expected inflation turned to go up with eased monetary condition.
This is why I cover short duration very slightly, not fully, now...

15.09.25 Daily Note : Changed Yellen?

1. Changed Yellen?

According to Yellen's speech last night, she and maybe other FOMC members seem to want to liftoff the interest rate until the end of this year, as given economic conditions. She changed the view about emerging countries from last week's FOMC meeting, to see the woes are not massive to effect on Fed's monetary policy trajectory.

In a conclusion, she said,
"I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change"

In her speech, she implicitly and explicitly argued inflationary dynamic continue to remain about 2% like 1990s and Fed not to forget the history that failing to follow elevated inflation despite there were some clues about that. It means maybe inflation dynamics are not linear. And Fed does not see this circumstance as the deflation. She said core PCE price is going to 2% gradually with downward pressure by temporary factors. U.S. economy is nearby the full employment condition and asset prices and consumption continue to improve, as they emphasized.

What caused this change for her now? Is not the change, but just tapping the market?
I believe Yellen tapped the market, not yesterday, but last week's FOMC meeting. She could be curious that the decision of monetary tightening amid easing environment in other development and emerging countries is right or not, while someone argued interest rate hike was needed for eliminating uncertainty at least. And then, she confirmed the consequence. It was tumbled stock price and weak emerging countries' asset prices and FX values. Furthermore, some economists started to argue the excessive easing policies could deteriorate sentiments of economic growth because of considering low rate as a signal of negative growth momentum. If then, rate hike could spur the economy ironically.

This result maybe enhanced the willingness of start of monetary tightening for Fed... And, in line with diminishing uncertainty, EM assets should not be weak further...


2. U.S. durable goods orders declined last month, but was slightly higher than market expectation.

Durable Goods NAICS Classification	Aug	Jul	Jun	Aug Y/Y	2014	2013	2012
New Orders (SA, %)	-2.0	1.9	4.1	-1.9	6.8	2.2	6.3
Transportation	-5.8	5.0	10.8	0.8	6.1	6.5	16.6
Total Excluding Transportation	-0.0	0.4	1.0	-3.1	7.2	0.1	2.0
Nondefense Capital Goods	-2.0	0.7	10.7	-7.5	6.6	2.8	10.8
Excluding Aircraft	-0.2	2.1	1.5	-4.0	6.3	-1.0	7.6
Shipments	-0.0	1.0	0.9	1.1	4.8	2.0	6.3
Inventories	0.0	-0.2	0.4	2.5	6.1	2.4	3.8
Unfilled Orders	-0.2	0.2	0.0	-1.2	11.4	6.4	7.5

3. U.S. new home sales in August was up to high since 2008. Real asset markets, especially property or residential markets seem somewhat solid...

4. European PMI eased...while German IFO moved slightly higher this month.
These pictures show mixed signals for growth rate in 3rd and 4th quarter as economists expect recent growth rate could remain in 2nd half this year with somewhat downside risk.

How about Volkswagen? The possible end of autos with diesel engines could affect on European, especially German automobile industries significantly? or just temporary and once loss from disruption by U.S.?

5. Mario Draghi argued the importance of achieving inflation target in ECB even as use further or expanding monetary easing tools. Just bluffing? due to given, known, or expected higher inflation rate at the end of this year? or he really consider the downside risk on inflation with Chinese worries? This would be the key factor in global financial markets... The volatility would be too high until confirming this during one or two months...

6. Taiwan cut the policy rate since more than 6 years ago. And India is expected to cut the rate further in coming months as well... On going currency war?

7. Putin meets Obama for discussion about Syria and so on.

Credit Strategy : Decrease Auto sector Position in Short term, At Least

The financial shock from Volkswagen is widespread to whole automobile industries yesterday.

10 year Volkswagen (VW) Euro bond yield soared by more than 100bps during just 2 days, whilst German Bund yield with almost same maturity remained low seen in below graph.

Orange Line : VW 2024 Yield / White : German Bund 2024 Yield

Soaring VW bond yield is leading whole corporate bonds yields to be higher as well.
It effects especially into automobile industries abroad.
In below graph, we could find current soaring VW yield caused Euro industrial sector bonds spread widening. It is in line with the movement in equity markets yesterday, creating other auto companies' equity prices to tumble.

Orange : VW 2024 Yield / White : Barcap EuroAgg Industrial OAS

In fact, I have no idea about whether this picture would go on further or not. This picture means the whole credit bonds, especially automobile corporate bonds prices could be deteriorated due to the side effects or spill over effects from worsening Volkswagen bonds prices. Someone argues this picture would be an opportunity to increase the position on the opposite side because current issue would be with Volkswagen only, not widespread.

But I plan to decrease the automobile sector position as considered worse scenario because I think the expected value is tilted toward negative side. In a credit bond market, we have to move earlier. If we approach to buy one, the gain would be small, but the loss would be massive.

So, I will sell some bonds in automobile sector and buy UST today. The position would be changed from slightly OW in automobile sector now, selling U.S. corps due to not having VW or other Euro automobile companies bonds, to slightly UW.

Besides, I plan to buy longer duration treasury bond against automobile sector bond. Selling 2.5 yr Ford bond and buying 7 yr UST, exactly, to cover short duration position very slightly. My conviction that the long-end yield should be pushed higher at the end of this year is weakened... while my position remains short now...

Summary of Federal Reserves Business Survey Indices in Charts

Some feds' business survey indices show negative activities in manufacturing industries recently.
How is it going?

15.09.23 Daily Note

1. China manufacturing PMI flash recorded 47.0 lower than expected 47.5 and previous month's 47.3. It is the lowest level for 6 and half years.
New orders index declined from 46.6 to 46.0 and output index lowered to 45.7 from 46.4.

2. Russia seeks to enhance power in Syria. Is it hopeful for U.S.? Time to increase the position in Russian assets?

3. Xi arrived U.S...

4. The EU reached agreement on a plan to relocate 120k migrants over 2 years, but 4 nations opposed the proposal.

15.09.22 Daily Note

1. UST 30 year yield soared over 3.0% again. Where it goes? I remain short position in longer tenor...

2. S&P warned Chinese bank risks in terms of vulnerable positions with weak property markets, while the price started to upturn recently...

3. Russia and Iran have stepped up coordination in Syria, creating a new complication for U.S. diplomatic goals. Going to talk? If then, increase in energy price is possible?

4. BDI and SHCOMP inched up further today.

5. Weekly strategy note may be passed this week... I have to prepare my business trip for next week...

Time to Overweight EM Sovereign bonds against UST?

All fear about monetary tightening by U.S. Fed, while Prime Minister in Indonesia which is one of vulnerable countries in Asia argued interest rate hike was essential to decrease uncertainty rather than increase additional market turmoil.

What is the truth?

EM bonds spreads have been widened since 2nd half last year due to oil price tumbles and strong USD very rapidly. After temporary decline in spread in 1st quarter this year caused by upturned oil price, the spread restarted to widen further with Chinese economic slowdown fears and ahead of possible U.S. Fed first rate hike.

But there is somewhat different. It's portfolio flow of debt assets from abroad to EM. According to IIF, Institute of International Finance, this inflow turned to increase since 2nd quarter this year. That said, recent price adjustment has not been with sell-off by foreign investors.

Yes. I believe Fed should raise the interest rate soon. But, while I expect bond yield to soar somewhat rapidly, EM bonds could outperform USTs, that means the spread tightening. Yet, almost participants seem to cautious to invest into EM ahead of Fed's tightening and possibly additional capital outflows.

In current environment, the uncertainty is likely more important factor in EM bonds markets.
Is it time to buy the fear?

15.09.21 Daily Note

1. U.S. leading indicator and coincident indicator was up in August, while lower than lagging data.
Especially, coincident data is much slower than lagging data as the ratio have declined somewhat faster. That said, current condition is worse than before, but futures would be brighter... But, this story is already old since 2013... Where is the bright side?

Business Cycle Indicators (%)	Aug	Jul	Jun	Aug Y/Y	2014	2013	2012
Leading	0.1	0.0	0.6	4.4	5.8	3.3	2.1
Coincident	0.1	0.4	0.1	2.3	2.5	1.9	2.6
Lagging	0.2	0.3	0.9	3.8	3.8	3.8	3.1

2. Main problem, in China, the 1st tier residential prices rose more than 10% year over year in August. SHCOMP was up 1.9% today....

...while CDS 5y premium soared somewhat rapidly making up last week's decline.

3. FBI investigates Malaysian fund while the scope of the investigation wasn't known.

4. Volkswagen equity price is tumbling by more than 20% now...

5. Weekly strategy has to be written...maybe tomorrow...

Answer from LSR, About UST Indirect Bidder in Auction and Quantitative Tightening

About previous post,
LSR answered...But, they are not clear...
They only suggest yearly sum data, not emphasized on recent soared yield...

The Opposite View on Quantitative Tightening

There are other criticism against so-called quantitative tightening.
According to LSR, some evidences underpin their opposite view on it.

LSR suggests declining global foreign reserves had not caused soaring UST 10 year yield during recent a decade with a left hand side graph. They argue the environment been with declines in foreign reserves mostly had led risk aversion trading made US treasury bond yield lower.

But, I think their calculation using change rate year over year is not adequate because the difference seems not significant. The change of global foreign reserves should been compared in longer term as I and many participants suggest the main difference between 2004 and now, both of ahead of Fed monetary tightening.

On the right hand side graph, LSR argues demands for long-end tenor US treausry bond are sufficient. They provide higher participation rate of amount accepted indirect bidders, considered as foreign main investors' demand including central banks and mutual funds, on 10 year and 30 year tenor.

However, I think there somewhat fault in their analysis.

Higher accepted indirect bid could be caused by lower amount of direct bid. So, we should check not accepted bidder amount, but tendered bidder amount considering whole size of bidders. See the below charts.

Direct Bidder Amount Tendered in 30 year Auction

In 30 year treasury bill auction, direct bidder amount tendered decreased sharply since start of this year. Higher indirect bidder acceptances maybe were caused by this.

Indirect Bidder Amount Tendered in 30 year Auction

In contrast of LSR's graph, this chart shows real amount of indirect bidders tendered is not higher than start of this year.

Indirect Bidder Amount Tendered in 10 year Auction

Even in 10 year tenor, the indirect bidder amount tendered started to decrease since May shown in this graph.

I will ask LSR about this...

15.09.17 Daily Note : Ahead of Upcoming FOMC meeting

Ahead of FOMC meeting,

1. Oil price rose more than 5% with decreased inventories data in U.S. So, commodities exporters' currencies such as BRL and RUB were appreciated in line with others including TRY.

The WTI price met the 1st leading span in Ichimoku chart signaling resistance point, ahead of upcoming FOMC meeting... Where will USD go after FOMC meeting? And then, how about oil price? In a weekly chart, upside potential for oil price seems sufficient... Tonight, could the price break this resistance line?

2. U.S. CPI decline reflected lower energy costs and core-CPI rose minimally.

Consumer Price Index, All Urban Consumers (%)	Aug	Jul	Jun	Aug Y/Y	2014	2013	2012
Total	-0.1	0.1	0.3	0.2	1.6	1.5	2.1
Total less Food & Energy	0.1	0.1	0.2	1.8	1.7	1.8	2.1
Goods less Food & Energy	-0.1	-0.1	-0.1	-0.5	-0.3	-0.0	1.3
Services less Energy	0.1	0.2	0.3	2.6	2.5	2.4	2.4
Food	0.2	0.2	0.3	1.6	2.4	1.4	2.6
Energy	-2.0	0.1	1.7	-15.0	-0.3	-0.7	0.9

3. The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo, NAHB index, improved to 62 (5.1% y/y) from an unrevised August level of 61. It was the highest level since October 2005 and beat expectations for 61 in the Informa Global Markets Survey.

Housing market seems quietly residential for now.
How the market will be after starting to tighten monetary policy by Fed?

4. Euro area headline and core inflation rates were revised down by 0.1pp to +0.1% and +0.9%, year over year, respectively, from flash data.

And there are other news,

5. China liquidated a record $83 billion in U.S. treasuries in July, via Z.H

6. Glencore, reviewed at a glance in previous post, said it raised $2.5 billion by selling new shares to a select group of institutional investors. The stock issuance is part of a $10 billion plan to cut Glencore's debt.

Below is a daily chart. MACD divergence signals the possible upturn soon...

7. 8.3 Magnitude earthquake strikes off coast of Chile.

8. S&P downgraded Japan's sovereign credit rating to A+ from AA- yesterday due to weakening economic growth, while no impact is on local government bond yield...

15.09.16 Daily Note

1. U.S. White House announced it does not support lifting a ban of oil exports. So, oil price soared after that slightly... It seems not significant issue for oil market yet...

2. S&P500 index and Dow Jones rose more than 1%. Someone says yesterday's U.S. equity market strengthening as a result of delayed possible timing of Fed's fund rate hike due to subdued retail sales data. But, as I commented, the data was not negative, so treasury bond yields soared rapidly. See the another post about this.

Rather, we should interpret equity market movement as the fear about interest rate hike starts declining with firm real economic data. Risk asset markets are alive.

So, we have to avoid underweight position on industrial corporate bonds as I planned.

3. SHCOMP closed up +4.9%

U.S. Corporate Bond Spread : Time to Transfer from Financial to Industrial Sector?

Does the burden of increased issues of U.S. corporate bonds finish?
Time to increase credit position and transfer from financial, the most stable sector, to industrial sector? In line with somewhat solid economic improvement?

Let's move ! Sell Goldman Sachs 2041 and Buy British Telecom 2030!
This transaction to decrease duration position and longer-end exposure also aims at adjustment ahead of FOMC meeting.

Barclays US Agg. Credit Avg OAS

Spread between Barcap Industrial OAS and Financial OAS

New Security Issues of U.S. Corporate Bonds

Yield Spread : GS 2041 vs. BRITEL 2030

Ahead of U.S. Fed tightening, Where is EM Local Bonds Going?

Below charts are about the representative ETF for emerging countries' local bonds.
As you know, EM local bonds have recorded negative return mainly due to tumbled FX rate.
And we are ahead of U.S. Fed tightening which have been a main fear of EM.

Where is EM local bonds going from now?
Ironically, MACD divergence indicates possible turnaround in both of daily and weekly candle charts...

Is this timing to invest EM local bonds?

Agriculture Price Update : Turnaround !

As I forecast in a previous post, agriculture price started to turnaround.
Recent robust movement partly is caused by USDA report publishing smaller inventory of wheat and so on.
And Australia referred El Nino would persist to early 2016, even this effect is somewhat vague for commodity price.

As a consequence, global inflationary pressure could arise toward end of this year...!

U.S. Treasury 30 year Bond Rate is Robust over the Resistance Line, 3.0% at last !

As I posted earlier, the resistance point, 3.0%, for a U.S. treasury bond 30 year, yesterday despite not so good retail sales data even lower than market expectation, albeit I think the data was some what good.

Ahead of FOMC meeting, almost participants focus on whether hike rate or delay it.
But, long-end yield would not be affected by the timing of rate hike. We continue to be cautious on long-end bond yields until end of this year...

German Bund rate was up as well, despite somewhat sluggish ZEW data.

Growth data or sentiment does not seem important for long-end bond yields...
More important factors would be inflationary pressure, or diminishing deflation worries, and a lack of demand...

Will ZEW Expectation Indicator Likely Lead Possible Tumbling Current Conditions?

ZEW expectation indicator lost further, whilst current condition index somewhat gains...