Forex Investment and Currency Trading

U.S. 2 year yields

The trend is down and the support level at 1.02%.(2003 long-term trend low) gave way today.
This confirms the further easing by the Fed is inevitable.

U.S 10 year yields – U.S. 2 year yields

Should test 275 bps…..but big caution would be signs of long-term quantitative easing which could flatten this curve as prior medicine fails to work.

German – U.S. 2 year yields spread

The long-term trend has turned here and we target the 200-week moving average, which currently stands at -44 bps. Maintaining that U.S. 2 year yields are still in a downtrend and are unlikely to rise anytime soon then German 2 year yields are expected to converge with U.S. yields by falling towards 1%. The trend in German 2 year yields is down…

German 2 year yields

• Support levels on German 2 year yields are at 1.96, 1.92 and then the low at 1.84
• Beyond that, a fall down to 1% (as per the explanation above) would not be surprising

German 2 year yields – ECB and U.S. 2 year yields – Fed Funds

Have we seen this movie before? One chart that we have been very focused on for the past 15 months has been U.S. 2 year yields and Fed Funds. When they were significantly inverted to the Fed Funds rate at the end of 2007 and going in to 2008, it was an indication that the Fed Funds rate was too high and more cuts were necessary. The pressures in the market place were at an extreme. Having already been 100 bps off the cycle high the Federal Reserve delivered an emergency 75 bps inter meeting emergency rate cut in Jan 2008. That is when U.S. 2 year yields were extremely inverted to Fed funds as highlighted in the chart above. The question now is whether the last remaining major central bank (ECB), which has not been aggressive in easing rates, faces the same issue? A quick move towards 1% in German 2 year yield could lead to such a scenario and corner the ECB into cutting rates dramatically.

Yields are falling for a reason. The economy is in recession and there is no inflation threat.

Bund

• The market has closed above the major long-term double bottom neckline that was at 118.48.
• The pattern targets 127+ with interim resistance at 122.65 and 124.60.
• The trend is up and the outlook is bullish.

German – U.S. 10 year yield spread

The trend has turned and lower levels look likely.