Although the Treasury-Bund and Gilt-Bund spreads have narrowed sharply since Spring of this year, George Davis, Chief FIC Technical Analyst at RBC Capital Markets, thinks the longer-term widening trend is about to re-assert itself.
For the Treasury-Bund spread, Davis favours a one to three month target of 170 bps. Given the significance and importance of the channel base, he favours using moves to 152 and 148 bps as an opportunity to put on widening trades. A daily close above nearby resistance at 157 bps would confirm a base and target 164 bps next, followed by 170 bps. He says to place a tight stop below 144, just below the ascending channel base. See chart.
For the Gilt-Bund spread, Davis favours a one to three month target of 135 bps. Support at 118 and 112 bps is expected to attract widening interest, with a breakout beyond 135 targeting the 146/148 area. See chart.