German bund yields fall after testing key level

Bonds in the US and overseas are rallying, pushing yields lower ahead of the FOMC decision.

Bond shorts are in a bind ahead of the FOMC decision. If Bernanke pulls QE3, yields will fall on Fed buying. If he doesn’t, yields could fall on risk aversion as the stock market gets ripped to shreds.

The scenario where yields may rise is if the Fed focuses QE3 entirely on MBS. In that case, the Fed may even suspend Operation Twist, which would be the worst-case scenario for bonds.

In Europe, yields are also sliding, which is weighing on the euro. German bund yields touched the 200-day moving average yesterday.