Traders Converting U.S. Bonds Into Eurozone Bonds

Includes: EU, FXE, TLT, UDN
by: Katchum

In March 2012, the U.S. government bond yields shot up, meaning that people are selling U.S. government bonds. So where did they place that money?

Investors have transferred that money to eurozone treasuries because a looming default has been averted by the ECB. The ECB printed a trillion euros in a few months time to help Greece, Italy, Portugal and Spain. This stabilized the eurozone government debt securities so investors are now more keen to shift their money into eurozone debt.

On chart 1 we can see that in August 2011 people sold eurozone Treasuries (blue line going down), while U.S. treasuries were bought (red line going up). That trend has changed now. From January 2012 onwards, U.S. government bonds were transferred into eurozone government bonds. And just recently we noted the biggest rise in U.S. government bond yields (7% increase in one day), which I wrote about in this article.

(Click charts to expand)

Chart 1: US Treasuries (NYSEARCA:TLT) VS Eurozone Treasuries (EU)

When we look at a longer time span (Chart 2) we can clearly see a negative correlation between U.S. bonds and eurozone bonds. When the blue TLT curve goes up, the red EU curve goes down. So basically sometimes people like U.S. bonds and other times they like eurozone bonds.

Chart 2: US Treasuries VS Eurozone Treasuries Longer timeline

The correlation can be expanded to the exchange rate between the euro and the USD. It follows the exact same pattern (Chart 3). If we look at the technicals of Chart 2 and Chart 3 we see a see-saw pattern. Currently the chart is at the bottom of the technical channel and indicates that it is the perfect time to buy euros (NYSEARCA:FXE) and sell U.S. dollars (UDN).

Chart 3: EUR/USD

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.