US vs EU risk-free yields

assessing differences in regional yields

Are yields moved by local or global drivers?

In summary, in the last month

• positive and high at 0.97, meaning that Treasury and Bund yields have moved in the same direction, consistentlyUS and German bunds are being currently influenced by local factors without a clear guidance from growth, inflation or monetary policy
• their 1-month correlation is positive and high at 0.97, meaning that Treasury and Bund yields have moved in the same direction, consistently

Looking at the US Treasury/German Bund relationship over different time periods

past week - the 10yr Bund/Treasury correlation is positive and high at 0.99, meaning that Treasury and Bund yields have moved in the same direction, consistently

last 3 months - their correlation for the period has been positive and high at 0.88, meaning that Treasury and Bund yields have moved in the same direction, consistently

IntroObserving the journey of two key yields - such as 10yr German Bunds vs US Treasuries - can help us understand how their underlying economies are performing and what are local investors currently expecting, bothuseful elements to make our investment decisions.

Are the monetary policies set by the ECB and the Fed diverging? What is the growth and inflation outlook for both US and EU? How do the regional fiscal policy and debt burden influence local yields?

DetailsThe correlation between German Bunds and US Treasuries is not stable and can fluctuate due to various economic factors. Historically, Bunds and Treasuries have shown periods of strong positive correlation, particularly during times of economic uncertainty, as both are considered safe-haven assets. However, recent years have seen a decoupling, with the correlation weakening and even turning negative at times. This divergence is driven by regional factors like differing monetary policy paths.

Influencing factorsFactors influencing their correlations are monetary policy (diverging rates set by the central banks), different growth speeds in the respective regions (leading to different inflation expectations). local supply and demand dynamics, not to mention local politics or geopolitical events.

Chart guideThe chart tracks daily yield changes for the two key government bonds with the same 10-year maturities. We can both visually examine the two trends in different periods - if broadly parallel or diverging - and we can also measure the 1-month correlation as a reference anchor to understand if yields moved together or not, and what has possibly be the key driven behind it.

EU peripheral spreads

a measure of market sentiment in EU

How much more peripherals pay vs risk free?

In summary

peripheral spreads are at their lowest level in 5 years

European peripheral sentiment has deteriorated since last week and it drifted higher by 28 bps over the past month

Detailed BTP/Bund spread change

• since last week - it drifted higher by 12 bps; Look into code error2
• since last month - it drifted higher by 28 bps

IntroEuropean peripheral spread refers to the difference in yield between government bonds of countries considered to be in the "periphery" of the Eurozone (like Italy, Spain, Greece and Portugal) and those of the "core" countries, primarily Germany. This spread reflects the perceived risk associated with investing in the periphery's debt compared to the relatively safer German bonds.

Italy & SpainThe yield spread is the difference in the yields offered by bonds from these different groups of countries. In the chart above, we monitor the difference between the yield on an Italian 10-year bond vs a German 10-year bond, reflecting the perceived higher risk of investing in Italy, and the yield on a Spanish 10-year bond vs a German 10-year bond, reflecting the perceived higher risk of investing in Spain,

Market implicationsA wider spread indicates that investors demand a higher premium to hold peripheral bonds, suggesting a greater perceived risk of default or economic instability in those countries. Conversely, a tightening spread indicates that investors are becoming more comfortable with the periphery's debt and are willing to accept lower yields, potentially due to improved economic conditions or the implementation of supportive policies.

In general terms, the size of the peripheral spread can also be an indicator of overall risk appetite in the market. When investors are more risk-averse, the peripheral spread tends to widen, reflecting a greater perceived risk of investing in the periphery.