It is noteworthy to observe how as U.S. high quality bond yields spike higher, sovereign bond yields are also pressing higher throughout the Eurozone. While this may not initially appear to be too surprising, the big difference between the U.S. and Eurozone situations is that as longer duration European yields grind higher, the shorter duration European note yields are moving deeper into negative nominal interest rate territory. Case-in-point: German sovereign 2-year note yields recently hit a new all-time low of -0.78% while the yield on the 10-year Bund has simultaneously reached a multi-month high of 0.35%. For comparison, the U.S. 10-year Treasury note currently yields 2.39% and the 2-year yields 1.11%.
Global Sovereign Bond Yields
Diverging short-term/intermediate-term European sovereign note yields are not exclusive to Germany. The 10-year note in France currently yields 0.75% while the 2-year stands at -0.65%, the Italian 10-year yields 1.98% compared to the 2-year at 0.05%, and in Spain the 10-year has escalated to 1.54% while the 2-year remains deeply entrenched in negative yields at -0.13%.
SPIAS interprets these apparent divergences as evidence that investors are starting to sense that massive monetary accommodation by the European Central Bank (ECB) has recently been gaining traction within the underlying economies, but not to the extent that additional stimulus will not be required from the ECB for the foreseeable future. For instance, while Eurozone consumer confidence turned out to be much stronger than anticipated in November, consumer price inflation and wage inflation remain extremely suppressed within the Eurozone. A wide range of individual European nation Purchasing Managers indices (PMIs), in addition to the pan-Eurozone manufacturing and services PMIs, have recently been showing signs of improvement, which is encouraging.
The recent revision to U.S. GDP revealed that economic growth has been upgraded to a better-than-expected +3.2% in the third quarter. In addition to keeping close tabs on U.S. econometric data, we will also be looking for evidence that a rising tide in the form of improving U.S. GDP growth is starting to buoy sovereign economies across Europe.
Article by S&P Global Market Intelligence
See the full PDF below.