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Bonds and Gilts

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Posted (edited)

@JamesIG,

Some traders on IG Community expect there to be a drop in major equities. They also think precious metal prices may go up. If this plays out then an important asset which often traders never seem to talk about or discuss is Bonds and Gilts. You may wish to set up a new section on the IG Community called Bonds?

If things do play out (there is no guarantee that they will) but if they and major stock markets decline and precious metals do increase in value then I think Bonds should see a price increase in such conditions as institutions and 'High Net Worth Individuals' (HNW) shift part of their capital into this asset class to protect their portfolios. Bonds are a 'defensive' assets that tend to rise in value in such conditions. The smart money tends to enter Bonds before the mainstream media talk about them. The smart traders will notice the trends before traders begin trading them. 

Have a look at the price action on some of the following:

  • US Treasury Bond
  • US 10-Year T-Note
  • German Bund
  • US Ultra Treasury Bond
  • US 5-Year T-Note
  • US 2-Year T-Note
  • Japanese Government Bond

I for one am keeping a close eye on the price action for these (above). I shall let the price action confirm my assumptions. Also Bonds as an asset class tend to be a lot less volatile than other asset classes so they should not be crazy daily swings like we are seeing on major indices right now. 

The one thing most of the above have in common is that they are all trading above the 20, 50 and 100 day moving averages on a '4 hour' timeframe. 

Edited by TrendFollower

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Whilst the underlying trade may happen, I doubt there would be sufficient number of people who trade it for it to warrant it's own section. Volumes for this asset group are VERY low. 

It may be worth putting posts like this in the Macro Events section. If there are sufficient unique threads then we can consider it. 

https://community.ig.com/forums/forum/29-indices-and-macro-events/ 

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If one looks at the German Bund chart then it looks very interesting indeed.

The trend is upwards and the price action is supporting this over the past 12 months which could possibly mean there has been a shift in capital and strategy for some of the largest players in the bond market.

The price is trading above its 20, 50, 100 and 200 day moving averages.

The German Buxl is also showing encouraging price action over the past 12 months.

The UK Long Gilt has spiked up over the past month and so too has the French OAT and German Bobl. If you then compare this with the 3 month Eurodollar price action then it begins to tell a narrative of what may be starting to happen with a shift in capital towards precious metals and bonds.

Once Brexit and US-China trade talks are concluded then certain economies around the world may begin to unravel and head towards recession. If this were to happen then Bond and Gilt prices may be a key indicator in terms of how they behave and react.  

 

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German Buxl up 115 points today at the time of writing. 

There were some really big and noticeable price rises today on the Bond market. 

The institutions will be shifting and allocating a proportion of capital from the super rich and wealthy investment portfolio's into Bonds. 

I think we are seeing that shift gather pace. It has been gradually happening slowly over the past 12 months but I think as Brexit and political turmoil around the world takes shape then it will be more obvious and apparent.

I would expect the Precious Metals market to move in tandem and more specifically Gold but this is an assumption and I shall wait for the price behaviour to either confirm or reject such an assumption. 

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In my personal experience when I see yields on Bonds declining it means that Bond prices are rising. This activity over a prolonged period can sometimes be a signal of a potential recession around the corner. 

UK Bond prices will be very interesting over the coming weeks and months. If this is to play out like I think it will then the price behaviour on Bonds and Gilts can be added to my 'decision making basket' so that it can assist me along with many other indicators as to when the market may begin to decline in anticipation of a serious recession. 

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Apparently Italian Bonds (especially long dated over short dated) over value. 

Italy's Most Beaten-Up Bonds Are Place to Be for NatWest, HSBC

https://www.bloomberg.com/news/articles/2019-02-12/italy-s-longer-dated-debt-is-place-to-be-for-natwest-and-hsbc

I personally am interested in Germany Bonds and potentially UK and US Bonds should they teeter on a recessionary phase. Also I have more confidence in Germany, UK and US Bonds over Italian Bonds. With Brexit and turmoil in the EU another Greece is just waiting to happen. 

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Keep a close eye on Bonds as this will be a useful indicator on expectations going forwards. 

@JamesIG, I don't know if there is a problem on IG's UK Spread Betting Platform but the US Ultra Treasury Bond was up over 120 points at an hour ago so around 6:00 pm UK time. Is this right? That would be absurd move in points!

I have to admit the platform is very 'clunky' today. It may be the trading volume with Brexit negotiations and the votes this week but the platform is shaky. 

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If you have a look at the US Ultra Treasury Bond at the start of March and now then you will see that there has been a gradual increase. 

343753204_UltraTreasuryBondDecimalised_20190319_20_11.png.e03c2da6d9d7a89a5c0027a95ba7503e.png

The UK Long Gilt is showing a similar trend.

1881476803_LongGilt_20190319_20_12.png.bd2591d28b37c2d30bf0bea0daeb49fe.png

The German Bund chart on a 4 hour view shows a very interesting narrative. 

Bund_20190319_20_13.png.34a7a69d3182c412a2a53c7cc969f567.png

If the big institutions want to reduce their exposure to risk assets and they think there is going to be large drawdowns on equities, re-balancing in portfolios can occur thus increasing capital allocation in Bonds and Gilts. I find looking at the price activity on Bonds and Gilts a good indicator to the risk appetite out there for the big institutions. 

 

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German, UK and US Bonds in general seem to be in the blue this lunchtime. Gold and Silver are both in the red but are not far and seem to be making a slow and steady rise upwards since the large correction last week around Thursday time. 

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UK, US and German bonds still performing well in the blue. German Buxl was up over 100 points a few minutes ago. Gold and Silver both still in the red and not showing the same strength. The US Dollar may have something to do with this but it seems risk off at the moment. Major indices down but Bonds up more than normal so far today. 

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Bonds have started another day in the blue and this time they are being supported by both Gold and Silver. I am wondering if there is likely to be seizmic shift in capital from higher risk (equities) to lower risk (Gold and Bonds)?

If one compared the price of Gold and Bonds against equities over the same period then it may help to indicate if this could be occurring.

The Brexit uncertainty and US-China trade deal risks still remain and whilst they still do I personally think it provides a positive platform for both Bonds and Gold. Now this may not translate into the price action as markets do not always behave as per textbook theory or in line with fundamentals or news.

However it is worth keeping a close eye on Bond prices as if they begin rising significantly then this could be a strong indicator for the future.

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A lot of investors and traders ignore what the Bond prices are doing. There comes a point in a 'economic' or 'market' cycle where allocation to Bonds can not only reduce the risk to your portfolio but also provide steady returns when other assets are declining in value. 

At the time of writing this post - The US Ultra Treasury Bond is up 150 points. This is attractive from a day trading or short term trading perspective. It also becomes interesting from an investment perspective. I have come across a lot of traders who ignore the price action on Bonds because it is not 'sexy' enough for them. I have also come across investors who decide to allocate capital to Bonds when it is too late and they are enter at the 'end of the party'. Not only do they then lose part of their capital allocated to Bonds but are the 'dancing by themselves' on the dance floor!

The German Buxl is up 360 points at the time of writing. Obviously the news that came out of Germany recently affected the DAX and one can clearly see a flight for capital into Bonds. 

So Bonds can be a very interesting market for both investors and traders during times of economic uncertainty and economic instability.

Is anyone else investing or trading in the Bonds market on the IG Community? 

 

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Posted (edited)

This is the current chart for the German Bund.

Bund_20190323_11_45.png.66a38943391b171ead874739bd88c48c.png

The above is the 'daily' chart. Now have a look at the weekly chart below.

Bund_20190323_11_46.png.32e8c49c1fca7d373e297bb0d3ce98f1.png

Now I am going to show you the monthly chart below.

Bund_20190323_11_47.png.47f6e1615a605c9ec24023a0acf71df7.png

Now you can begin to see from an investment perspective the capital growth available on Bonds. Bonds are traditionally and historically a defensive asset. There will be plenty of equity funds and investment trusts that outperform Bonds over the same period of time. However, we are entering times of uncertainty and therefore wise to have even a small allocation of Bonds in your investment portfolio. Now this could be anywhere as low as 1% or higher depending on your risk profile and tolerance. 

Bonds are also good to day trade on those days where there is an increase in market uncertainty, economic instability and basically an increase in panic!

Bund_20190323_11.46.png

Edited by TrendFollower

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If major equity markets take a tumble then Bonds should perform strongly in this period.

It would not be unreasonable to think that over a 2 to 5 year period that Bonds outperform Equities.

Of course this may not happen but it would be wise for investors to allocate even a small percentage of their portfolio to Bonds. Some of the valuations seem very high to me, especially those in the US, and it is very unclear if those companies will be able to achieve the financial results necessary to keep such high valuations. 

Also for investors this strategy could be aligned to their risk management strategy within their investment portfolios. 

What I fear is that a lot of investors may only turn to Bonds once any major corrections in equities is firmly in place. By then the smart money has already been allocated to Bonds and the latter investors end up paying a high price for investing. They are also left till the end as the smart money will leave before them meaning they are likely to make a loss.

There will be some that may not agree with my sentiment but for those (they could be right and I could be wrong) I suggest just keeping an eye on the price action of Bonds. See what Bonds have been doing in terms of price behaviour over the last couple of years, what they are doing now and what they are likely to do going forwards. 

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This article from the Financial Times is rather relevant to this specific thread.

Global investors make record shift into bonds

https://www.ft.com/content/57c94330-02b0-11e9-99df-6183d3002ee1

The increase in capital being allocated to Bonds has led to the price action that we have already seen. Those in early will have benefited. The point I was alluding to in the previous post is that those who enter later will not necessarily obtain the gains that those in the past have received.

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IG have posted this today on the main screen under News and Analysis:

Trader's thoughts - The world economy’s health is looking worse than previously imagined

A return to a negative-yield world

The consequences of the bad PMI numbers were immediate and explicit. The yield on 10 Year German Bunds raced to its ignominious and long-awaited milestone, cracking into negative yield for the first time since mid-2016. If there is any evidence necessary that the global economy is at the end of a cycle, it’s that ****-bit of information. The rush into government bonds on Friday was ubiquitous, however, and has created some worrying price action. Conspicuously, the rush into US Treasuries has put the yield US 10 Year Treasuries to just above the current US OCR at 2.40%. Furthermore, Japanese Bond Yields have travelled further into negative territory itself, with the 10 Year JGB yielding -0.08%.

 

Rate cuts being priced-in across the globe

The falling yield environment is, of course, being driven by a pricing-in interest rate cuts in developed economies the world-over. Though directly caught in the fray on this occasion, as far as the disappointing data goes, the materialising prospecting of weak global demand has seen traders boost their bets on a US rate cut in the next 12 months. The implied probability of a cut from the US Federal Reserve by January next year leapt to almost 80%. The price action has led to a disturbing event in rates markets: the spread between 3 Year and 10 Year Treasuries has fallen to 0 basis points, inverting the yield curve between those two maturities.

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There is a lot of talk about the yield curves and inverted yield curves on other threads and IG themselves have released material on this very matter. Below is an article which will explain it nicely. 

The US bond yield curve has inverted. Here's what it means

https://www.cnbc.com/2019/03/25/the-us-bond-yield-curve-has-inverted-heres-what-it-means.html

For some of you who are not familiar with Bonds, below will help to explain Bond Yield and Returns.

Bond Yield and Return

http://www.finra.org/investors/bond-yield-and-return

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There is a possibility that the Bond markets are overreacting. There is also a small chance that speculative capital has arrived more recently too. One must remember that Bond prices have not just reacted upwards overnight and they have been creeping up gradually and for a while.

The media always reports once they have noticed the pattern / trend but not necessarily when traders have idenfitied the pattern / trend. 

However, just think if there was a recession in the US then what would the US Government do? Lowering interest rates would be one of the tools available to them. This notion is now being talked about and may be causing the price behaviour within the Bond markets.

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I see @JohnDFX from IG has posted a blog entry in Market News today which is relevant to this thread.

Post-Fed; yield curve inversion; another reset in the Brexit timeline - DailyFX Key Themes

 

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From an economics perspective, when bond yields decline, the bond prices will rise and vice versa.

In my experience, when there is economic uncertainty, political instability and risk increasing then capital will shift into bonds. This will in my opinion lead to higher bond prices and bond yields declining. This is what the bond market has been experiencing and what we have all been witnessing. 

The article below is trying to alert its readers.

One by One, Global Bond Markets Are Flashing the Same Warning

https://www.bloomberg.com/news/articles/2019-03-24/aussie-10-year-bond-yield-drops-below-1-8-to-new-record-low

 

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Apart from the Italian BTP and Italian BTS all Bonds available on IG's platform are in positive (blue) territory.

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