Experienced Technical Analyst does not look at a price chart as simple moving lines, but tries to understand, through its trends, the history of price balance between buyers and sellers, why it has developed in a certain way and where it tends to go.
So, looking at the graphs, we can identify certain particularly important price thresholds where the balance between buyers and sellers has changes, sometimes sudden changes.
If we look at the graph of the yield of the ten-year future BTP, we notice that a very important equilibrium point is the level around 2.5% (level 3 in the chart). Historically it has been touched twice (beginning 2015 and beginning 2017, R1 and R2 points), and in both cases there has been a change of predominance from sellers to buyers. This point of resistance is therefore only broken if the underlying conditions change and lead to a new scenario (where the market Animal Spirits, impersonated by fear and greed, take over violently). This has happened in recent days (“a” point), due to the well-known Italian political problems, but probably, as we will see below, there could be more. Interesting to note also that the oscillator (RSI), touched an historical highest point of overbought condition (point “b”).
The next question could be where is the next point at which yields could find a new resistance. Historically the next level is at 3.6%, which in the past has been touched twice, at the end of 2010 and the beginning of 2013 (S1 and S2 points in graph 1), contributing as a support level. At the beginning of 2014, the support was broken (a broken support becomes a future resistance), and the yield then dropped to a new support: a historical minimum touched twice, around 1.05% (level 1 in chart 1). From 2017 onwards, the yields shifted to a new support at 1.6% (level 2 in chart 1). So, in the last 3,5 years we have two support levels, and now we have a new support at around 2.5% (level 3 in chart 1).
From an exquisitely chartist point of view, the new band of oscillation of the interest rate of the ten-year Future BTP is between 2.5% (new support) and 3.6% (new resistance). However, a shift about +/-0.2/0.4% in both directions cannot be excluded: in the last two years in many charts there have been many false breaks in support and resistance areas, which have, however, subsequently re-entered: this is a recent phenomenon of this “new normality” that denotes a strong indecision of economic operators, wich causes extreme short-term trends.
During the sell-off day of May 29th, Italian bonds yield had a strong spike and, at the same time, there was a flight in government bonds considered safer, such as Bund and Treasury (see next graph, on the right, relating to the month of May in the three curves).
But what is the ideal rate at which a buyer decides it is convenient to buy a 10-year government bond? On the American market a compromise level where you start to exit the stock market and buy Treasury, is generally around 3%. The Italian ten-year BTP has a BBB rating compared to an American Treasury that has an AAA rating. It is therefore reasonable to think that buyers want a higher premium for risk: many operators point out that the 10-year Italian BTP yield has a lower return than the American Treasury. It makes little sense for an AAA-rated government to have a lower yield than a BBB-rated government. Certainly, the presence of the European QE and the ECB’s policies of negative short-term rates are distortive for the European bond market. In any case if you buy a ten-year BTP in Europe, you still get a much higher return than the ten-year Bund.
However, we are moving towards a period of normalization, where the European QE and Draghi policies will be reduced, and therefore a physiological return of European rates to “normal” levels is due. On the other hand, central banks handle the short part of the interest curve, but longer maturities are subject to market forces, which generally always move in anticipation of future events. Therefore, a physiological return of rates to higher levels, especially starting from the most problematic countries of Southern Europe such as Spain and Italy, was due, and the stress caused by political problems could be considered simply a catalyst event to begin a healthy normalization, which will touch in the near future also the German Bund rates.
Mario Valentino GUFFANTI CFTe – SAMT Vice President – Swiss Italian Chapter – firstname.lastname@example.org
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.