FxWirePro: 10-year bund rally likely to be limited, downside risks higher

The German 10-year bund is currently trading at 160.4, and we are as of now maintaining our short position that was triggered at the breakout of 162.5 area. In an article published on October 26th, we recommended selling 10-year bund at a breakout of 162.5 area with the first target being around 160 area and we forecasted the bund to drop towards 153 area. The story is available here, http://www.econotimes.com/FxWirePro-10-year-bund-heads-for-a-sell-breakout-367667

Our first target of 159 has been reached by the second week of November and we expect the bund price to slide further and the yields to move higher. We maintain the price target above.

Two major risks to this outlook are,

• A massive risk aversion that would prompt investors to jump to the safety of the bund.
• European Central bank (ECB) unveils further easing.

As of now, in both of the above cases, we don’t see the 10-year bund strengthening beyond 163.8 area. Even that would provide a fresh opportunity to go short again.

In addition to that, downside risks stemming from the sharp rise in inflation, decoupling of long-term rates from ECB policy and political turmoil across the continent are much bigger than the upside ones.

We would also like to add two more interim targets; 157.4 and 155.2