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Outlook: Bonds

New rally slowly developing

April 23, 2008


Chart of outlook for Australian bonds as at 20 Oct 2005

21 April, 2008

AUS 10yr bond prices failed to benefit from the strong rallies in the US T-Note prices over the past 9 months and have been kept to a tight and whippy range. The sharp rally recently, from 93.460 to 94.240, to just above the highs of the past 9 months, raises the prospects that at last the AUS bond prices will follow the T-Note prices.

It is still early times to be confident in a reversal and the basic aspects of the decline are still in place. The weekly-based mvg avg is still trending lower and price was not able to hold above it for long and trendlines and trend channels are still in place.

The aspects that warn of a possible change in trend are firstly the US T-Note prices threatening to move through the last major high of 120^14 and that this rally will persist till September. Rises through the 2003 peak will make it difficult for AUS 10yr bond prices to maintain the current decline.

Secondly, the cycle rolled over in the middle of March and was preceded by the sharpest rally for some time that peaked just above the highs of the past few months. Normally a high in line with the cycle rolling over will call for a resumption of the decline. However, in double bottom lows, the cycle rollover will occur on the midpoint of the two lows.

Finally, the decline of the past two years has been congested and has held above the multi-decade upward trendline, suggesting that in the long-term prices will rise again.

So provided the current drop holds above 93.460 over the next month or two, then a low is forming for the March rollover and prices will be free to rally.

The long-term vibrations point to the possibility of a rally of some years. However, it may be some time before a sustained rally becomes evident as the action since the 1998 peak suggests a triangle consolidation developing. The February low completed the 3rd leg so the rally commencing now is just the 4th leg and should be followed by another decline to complete the pattern. So prices may be kept to a 93.600/95.000 for a couple of years before a definitive rally is seen.

Only a drop through 93.000 will suggest that the upside will be avoided.

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