Since the BOE was the first to raise rates in November 2021, followed in February 2022 by the Fed and finally in June 2022 by the ECB, the (continuous) futures on the respective 10-year rates have had a hard time: the UK GILT suffered the most, marking -25% in price, but also the best performing among them – the US 10Y T-Note – marked -16.5%.
UK Gilt (green), EU Bund (purple), US10YR (Blue), 2021 – Now
These are very big percentages for government bonds prices – one of the largest markets in the world – and with few precedents, so we would have to go back to the late 1900s and early 1980s to see something similar (after all, the bond bull market is about 40 years old).
This has brought 10-year rates to 4.446% in the UK, 4.151% in the US and 2.56% in Germany (the official benchmark for the Eurozone), yields that are decidedly attractive and in many cases higher than the dividend yield offered by the vast majority of equities.
Is this a good time to buy the long end of the curve? Certainly, the already high implied yield is coupled with the possibility of significant capital gains on bonds, over a time span of probably a few years. But on futures, it’s a bit different. Volatility on the 10-year is still historically high, as you can see from the BOFA MOVE index, meaning that we likely still have a period of constant ups and downs ahead of us; and a 10-year is certainly not a Meme stock that will go up in a straight line.
BOFA MOVE Index
But all 3 futures under consideration are now in a similar situation, just a few months after a turn in monetary policies: they have found a technical bottom (108.25 US10Y, 130.75 Bund, 91.55 Gilt) already tested several times in the last 12 months and are close to a mid-term bearish trendline; in the case of the Gilt it even seems that this trend is about to be broken (not yet confirmed). As technical analysts know, a break-up usually leads to an extension/rally. But as mentioned above, even if this happens in the coming weeks, there will be other obstacles to the appreciation of these securities and for a consistent rise we will have to wait for clear signals from the central banks of the willingness and possibility of lowering interest rates. The most likely short term outcome is short term rallies followed by selling episode framed in a longer term sideways or slightly – very slightly – bullish phase.
UK Gilt
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Marco Turatti
Market Analyst
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