Yields on Italian BTPs Break Support Bonos Follow

Italian 10-year government bond yields post their fourth consecutive monthly decline, the longest decline in three years.

One of the least discussed aspects of the ECB’s announced OMT programme was its counter-intuitively stabilising impact. The announcement did not force Spain into requesting sovereign aid, but it succeeded in supporting the euro, sovereign bonds as well as European bank stocks. Those improved ‘market metrics’ removed the market strains accompanied with forcing a nation to request a bailout and led to more favourable conditions, enabling economies to pursue austere policies in less strenuous market environments.

More importantly, 10-year BTP yields have broken below their 200-week moving average for the first time since December 2010. The first attempt occurred two weeks ago, followed by a rebound, but this week’s renewed decline is rather considerable.

The Death Cross on the weekly chart is illustrated by the cross-over between the 55 and 100 WMAs. The chart shows two previous occasions of Death and Golden Crosses when yields moved accordingly. Not shown on the chart is the Golden Cross of 2006 (leading to higher yields), and the Death Cross of 2004 (leading to falling yields).

On the monthly chart, 10-yr BTP yields drop below their 100-month moving average, shortly after breaking below the 55- and 200-month moving average.
Marrying such powerful indicators from various schools of technical analysis bolsters the case for further yields downside and is consistent with our previous calls for EUR/USD and equities aid out here, here, here and here.

Sovereign bond spreads (against 10-year bunds) are also falling sharply. Spreads on Greek 10-year yields over their German counterpart hit 10.25% (from 35% in February) – the lowest in 19 months. Portuguese 10-year spreads have more than halved to 5.55% – the lowest in 18 months.

Spain’s 10-year yields have also fallen for the fourth straight month, hitting 5.17%, down 33% from their June highs. The weekly chart shows the next technical target stands near 4.92% – the 200-WMA. A move from the current 5.26% to 4.92% would likely translate to the next EUR/USD run-up, now seen at 1.3370s.