RISING EUROPEAN YIELDS
MIGHT MEAN TIME TO BUY BUNDS

A whole new trading week gets underway today with bond traders hoping their fortunes might change. Bond market sentiment turned gloomy as corporate earnings created a spark that ignited the equity market, which in turn revitalized commodity prices and sent the dollar lower. Bond prices and yields have an inverse relationship and to express the price pessimism numerically, the new-found economic optimism sent 10-year benchmark yields up from 3.27% to 3.58%.
 
Sellers of bond reacted mercilessly to rising equity prices and we'd be unsurprised to learn that asset class switching was occurring, while equally it would be of little surprise to learn that selling pressure triggered stops creating a virtual selling spiral. In a sense that makes for a potential rebound in bond prices this coming week.

But the bigger opportunity might not be in the United States. Rather it might be in the German government bond market. That's one of the possible goldfields the Supreme Council will discuss when it meets on Monday evening. You never know it may well become a trade for Tuesday morning's issue of Jurojin Weekly.
 
While it's true to say that international bond prices to tend to move in tandem, it's also accurate to say that Eurozone prospects are not as positive as they are in the United States. A big factor in why the global economy is showing signs of recovery is to be found in governments' stimulus packages, which so far add up to around $2.2 trillion. However, German isn't a big fan of what it considers throwing good money after bad and so hasn't embarked on a program equally as supportive as have the Americans, Britons and Chinese.
 
It's also possibly true to say that second quarter signs of recovery might have made European investors simply feel better and created the illusion of sustainable recovery just because there were green lights flashing globally.
 
The ZEW economic sentiment survey had been rising between October 2008 and June 2009. But the July reading stalled marking the first fall in nine monthly reports. The survey asks investors and analysts how they feel about economic activity over the coming six months. Onlookers fear that such pessimism will temper economic expansion with the largest fear being expressed over borrowers' ability to secure much-needed financing for current and future projects.
 
Despite all the talk of the recovery Germany, Europe's largest economy is still expected to contract sharply this year, while a coincident ZEW indicator intended to gauge current conditions speaks volumes. It improved marginally but still reads a very negative -89.3.
 
Still the danger with German bunds is that they will likely continue to trade in sympathy with U.S. government note prices. They fell in price Friday after a strong U.S. housing starts figure stoked recovery hopes further in turn reducing the need for the safety of government debt. German yields rose to the highest in two weeks. During the last month, Bloomberg data highlights the potential for a slower recovery in Europe than in the United States. Treasury investors have lost 0.1% through last Friday while investors in German bunds have returned 0.5%.
 
That makes perfect sense to us given the disparity between the data. German debt looks attractive and yet the trick will be timing the entry for maximum impact. A nice bearish run on Monday morning would be a good place to start.

The Supreme Council of the Secret Order of Jurojin