Central bank divergence drives US and German yield gap to 27-year high

Posted on November 18, 2016

Mind the gap.

Divergent paths for monetary policy in the world’s two largest central banks is making from some striking yield charts.

The spread between US 10-year treasury yield and its German equivalent has now reached its highest level since 1989, in the days before German reunification, according to data compiled by Bloomberg.

Sovereign bonds have been gripped by a brutal sell-off in the wake of Donald Trump’s impending arrival in the White House, with the yield spread between Treasuries and Bunds now climbing above 2 per cent.

Although Bund yields have jumped from their record negative summer lows to around 0.3 per cent this week, US Treasuries have leapt markedly to their highest level in a year at 2.2 per cent (yields fall when a bond’s price rises).

As investors shift their outlook for US inflation in anticipation of some mega-Trumpian fiscal stimulus, things in Europe look far more subdued. ECB president Mario Draghi warned today the eurozone’s recovery remained reliant on the central bank’s policies, with inflation yet to show any signs of sustained upward momentum.

The Federal Reserve is now widely expected to execute its second rate hike in 12 months in December, while the European Central Bank is set to extend its monetary easing measures by six months at its next meeting on December 8.

Flatter European yield curves also reflect a more downbeat look for future growth in the continent, with the prospect of fiscal stimulus in the continent remaining far more modest (more on that here).

Bond investors are now gearing up for a “bear market”, says Michael Hartnett at Bank of American Merrill Lynch, who notes that this week has seen $18bn in global bond outflows – the biggest in more than three years – in the wake of Mr Trump’s election.

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