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Technical Update - UK 10-year Gilt yields sky rocketing to 2007 level. Can it reach 5% or maybe even 6%?

Bonds 3 minutes to read
KCL
Kim Cramer Larsson

Technical Analyst, Saxo Bank

UK 10-year Gilt yields skyrocketing higher to above 4% hitting 4.5%. No strong resistance until around 5.56%. Technically it can move much higher - but will it?



Back in 2021 the UK 10-year Gilt yield broke above the falling trend line going back to 2006. Since the breakout yields have gone up almost vertically – especially past two months.
This week it jumped to the 0.786 retracement of the 2006-2021 down trend close to the 0.382 retracement going back to yield 1998-peak to 2020-low trend.
UK 10-year yields are now back in the consolidation area from 1998-2007 between 4 and 6%.
Unless yields collapse on the last two trading days of September there is room for further upside. Monthly RSI is above 70 i.e., in “overbought” territory but there is no divergence indicating higher levels could be seen.
There is some resistance at around 5% but the big test is likely to be the peak in 2006 at around 5.56% and the psychological level at 6%.
A close above 5.56% there is much more upside with no strong resistance before 7.66-8% i.e., 1.382 projection of the 2006-2021 down trend and 0.618 retracement of the 1998-peak to 2020-low trend.
To demolish this bullish picture Gilt needs to collapse and close below August 2022 lows.
A minor set-back that keeps Gilt above the 200 SMA is likely to just be a correction.
Source: Bloomberg

Very short term the Body gap on the Gilt Future between last weeks and this week’s candle should be observed. If it closed a larger rebound to 105-109 level could be seen i.e., a rebound to 0.618 retracement of the past couple of weeks sell-off and the 0.382 retracement of the past 12 months downtrend, with some resistance at 105. Strong resistance at 109.89. That level is key.

The current candle on weekly could be forming a Hammer (the Body of the candle must be at least twice the length of the lower shadow to become a Hammer, and no or very little upper shadow – similar picture on GBPUSD as described a couple of days ago).
If Gilt does not form a Hammer and does not close the gap selling pressure is likely to quickly resume pushing Gilt below 91 i.e., higher yields.

Source: Saxo Group

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