UK 2 and 10 year Yields: Levels, Ranges, Targets

The only commonality in the 2 and `10 year Gilt yields from the 0.384 and 1.368 closes is correlations remain positive throughout monthly averages 1, 2, 3, 5, 7 and 10 years however correlations severely drop in the 3 and 5 year and regain normal associations in the 7, 10 and 1 and 2 year averages. The current 10 and 2 year spreads based on closes extends to 0.984 and is low based on overall spreads between 1- 10 years. The current US Treasury 10 and 2 year spread runs 1.0178 to offer comparison. The 10 year Gilt yield is the driver in not only the 2 year yield but also dictates spreads because the 10 year is severely out of range in averages from 3- 10 years. Both the 2 and 10 year yield has ability to rise yet not affect the nearest 1.2088 spread.

Correlations in the 1 and 2 year averages between the 2 and 10 year yields reveal 87% and 91% but drop to 39% and 64% in the 3 and 5 year averages. The 7 and 10 year averages remain high yet correlate to 87% and matches the 1 year correlation. Correlations are high yet overall the message in the short end of the yield curve is maturities are healthy at least as it pertains to the post 2008 period.

Spreads 10 – 2 years between the averages factored from 1 – 10 year at 1.2088, 1.3399, 1.4174, 1.6070, 1.6501 and 1.9047. The spread at 1.9047 is actually the 7 year average while 1.4174 is the 10 year. The most important spread is 1.2088 yet spreads are wide. To offer a spot comparison to US Treasuries.

From January then December 2003, US Treasury spreads traded 2.27 and 2.43 in December 2003. In 2004, spreads traded 2.44 and 1.16 while 2005 spreads ran from 1.13 – minus 0.02. In 2006, spreads traveled from 0.03 – minus 0.11 while 2007 ran from minus 0.12 – 0.99. In 2008, spreads widened from 1.03 January to 1.45 December. Gilt spreads reveal any rises in either the 2 year, 10 or both are corrections in an overall downtrend.

For the 2 year from current 0.384, upper most range points are found at 0.5921, 0.4455, 0.4393, 0.4367 and 0.3979. Overall averages from 1 -10 years are located from 0.4863, 0.5272, 0.5464, 0.575 – 1.7307. Bottom range points are found at 0.3203, 0.3073, 0.3061, 0.1449 and 0.0653. Vital buy sell break points are located at 0.3798, 0.3714, 0.2952 and 0.2316. To head lower, breaks must be seen at 0.3798 and 0.3714. Current prices remain in well defined ranges from averages 1 – 10 years.
For the 10 year from current 1.368, upper most range points are located at 1.5953, 1.6434, 2.4057, 2.3542, 2.4126 and 2.9705. Bottom range points are found at 1.3381, 1.3214, 1.4889, 1.5818, 1.5910 and 1.8317. Overall averages are located from 1.736 – 1.9149. Most vital buy / sell points are found at 1.3381, 1.4824, 1.9473 and 1.9680. Current price at 1.368 is far outside ranges from averages 3 – 10 years and well within ranges from 1 and 2 years. Big supports are found at 1.3381 and 1.3214. The next vital average break above is located at 1.736 yet current price trades below every average from 1 – 10 years. While 1.736 – 1.9149 serves shortest term average break points, longest term average ranges are found between 1.736 – 3.1481.

Targets for the 2 year begin at 0.4121, 0.4141, 0.3937, 0.2925 and 0.3195. Targets for the 10 year start from 1.4872, 1.5180, 1.6618, 1.6382, 1.7525 and 1.97. The June Brexit vote must factor to targets especially the 10 year as well as 0.5% GDP, 1.1% downslides in manufacturing output, 23.8 billion trade deficit V EU and 13.7 billion V the remainder of world trade partners. Iron and Steel are main factors last quarter as trade with China slowed. Inflation not only remains low and below target but overall economic news from the UK lacks positive momentum.
Further, no reason exists to take the 10 year yield to upper decks and explains why ranges are out of kilter particularly as the BOE may threaten rate hikes, the downtrending news and Brexit situation lacks ability for the BOE to raise anytime soon. Upper deck targets to achieve would require rate hikes. Recall when the 10 year was 2.56 and GBP/USD was 1.7000’s in July 2014, news outperformed and the BOE threatened then to raise. Since World War 1 when GBP was Fixed to $20 Gold at GBP/USD 4.86, GBP/USD was firmly connected to the FED which means any rises or falls in Fed Funds met immediate response from the BOE but not this time therefore any rises in the 2 and 10 year yields and GBP/USD must factor as corrections within a much larger downtrend.

For interested, new focus on GBP pairs and UK news and markets.

Brian Twomey, Inside the Currency Market, btwomey.com

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