Bond today – Extra-long government bonds are going “long”. However, it is too early to claim victory

The announcements of the last few days signal to us that in the euro area the effects of inflation are easing, that the ECB could slow down its path towards raising rates – or even stop it – and that government bond yields are starting to show volatility.
The real news, however, is different: we are witnessing a movement in the "yield curves", with the long part rising again.
The German thirty-year bond went from 2.7 to 2.9% in one month, while the Italian one jumped from 4.9 to 5.12%.
In recent sessions, however, an opposite bearish and non-negligible reversal has been recorded.
This means that the prices of extra-long tubes increased almost suddenly, contradicting what is evident when observing the data on a monthly basis.
The Bund with 0% coupon An attractive security from this point of view is certainly the 0% Bund August 2050 (Isin DE0001102481), which in a few days on the Italian Stock Exchange went from 43.8 to 47.1 euros, with an acceleration in the last sessions.
In reality, there was a collapse at the beginning of October, with a bearish peak on Wednesday 4th.
From there a rebound started, which however does not close the V-shaped figure – so-called V bottom – which began in September.
For this to happen, a rise above 48.5 euros or even better above 51 euros will be necessary.
This government bond is interesting for two reasons: it has a "duration" (sensitivity to rates) of 26 – decidedly high – and with the 0% coupon it does not involve accrual implications.
Austria 0.85% 2120 No less attractive is the champion of very long maturities, i.e.
Austria 0.85% 2120 (Isin AT0000A2HLC4), which being a centenary is often the most cited when talking about extra-long government bonds.
In fact, its volatility is very high even within single sessions.
The related graph corresponds to that of the Bund, with logically different prices: minimum on Wednesday 4 October at 34.3 and rising to 38.5 euros today.
The closure of the V-shaped figure would occur in this case with the return above 40 and even more so above 41 euros.
For Austria the "duration" is a real record, standing at 43.6, which is evidently due to a residual life found on few other government bonds.
The Italian BTP 2.15% 2072 If the Bund and Austria have anomalous peculiarities, the longest Italian BTP falls within a less exasperated case study.
Here too, however, the V bottom manifested itself, with the minimum of 4 October at 48.4 euros and a subsequent rise up to 52.8 in the middle session of October 12.
The closing of the movement would occur above 54 euros but above all with a stabilization above 57 euros.
In the case of the Italian the "duration" is limited to a value of 22, lower thanks to a larger coupon compared to the previous titles.
A confirmation: volatility will increase.
Graphic analysis scholars maintain that a V bottom usually anticipates a phase of volatility.
It is likely that this also happens for extra-long government bonds, whose fluctuations follow the classic price formation rules of the stock exchange.
On the other hand, the uncertainties and contradictions in the ECB's decisions will be the dominant theme in the bond sector in the coming months.
The ongoing rise in prices should therefore be taken with some caution.
The absolute minimums have probably been reached but it will still take time to claim victory.

Author: Hermes A.I.

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