Bunds decouple from havens?

It was a busy week. However, few interesting things happened on markets and should be considered in terms of future markets movements.

Firstly, euro zone leaders still tries to calm down markets by no meaningful meetings. There are no conclusions about financial taxes, ECB bond buying program and more importantly, it is almost certain that eurobonds will not be introduce on markets because in other case the incentives to fiscal tightening will be abandoned.

The most ridiculous thing for me is the fact how wide is the spread between the French and German government bond yields. These two countries are the core of Eurozone and they both have a Triple-A credit rating. However, the gap between these yields is, as far as I am concerned, too huge for countries with the same credit rating. These mean that either France will lose their credit worthiness or German bonds will go down (so that yields could go up).


French-German 10-year yields spread
Source: Bloomberg

The last idea is not so impossible as it seems to be just few day ago. Germany had a huge difficulty completing its bonds auctions on Wednesday. In fact, there was the lowest demand at an auction of the 10-year bonds since the euro was created. As a result yields skyrocketed and as a sign of Germany losing some of its safe haven lustre, the UK’s cost of borrowing benchmark 10-year debt fell below that of Germany on Thursday for the first time since March 2009 (when the Bank of England launched quantitative easing to stimulate the UK economy). I do not have any experience in bonds trading, but if we take a look on the futures German Bunds chart, we can see a double top pattern as the indication of losing upward momentum on market. On the other hand, the price is on the median lines of Pitchfork and just a little above the long-term trend line.