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.

US Real yields

dissecting the US Treasury yield components

What's the real US yield after inflation?

In summary

• in the past month nominal yields moved higher by 4 bps, as a consequence of inflation expectations staying unchanged by 0 bps and real yields moving up by 4 bps
• real yields are rising faster than inflation expectations, pointing out to tighter monetary policy from the Fed expected next, and - in parallel - faster growth expectations and/or bigger Treasury issuance (more US debt building up) in the future

More timeframes:

• in the past week nominal yields moved lower by -1 bps, as a consequence of inflation expectations moving up by 1 bps and real yields moving down by -2 bps: real yields have compressed faster than breakevens, pointing out to easier monetary policy from the Fed expected next, and - in parallel - slower growth expectations and/or slower Treasury issuance (less US debt building up) in the future
• in the past 3 months nominal yields moved higher by 17 bps, as a consequence of inflation expectations moving up by 10 bps and real yields moving up by 7 bps: real yields are rising more slowly than breakevens, pointing out to accelerating inflation expectations making US Treasury nominal yields less compelling

IntroReal US Treasury yields represent the return on Treasury bonds after accounting for the impact of inflation. They are essentially the nominal yield (the yield we see quoted in financial markets daily) minus the expected inflation rate, providing a measure of the real return an investor can expect after inflation erodes purchasing power.

Yield componentsThe US Treasury yield - or nominal yield is the stated interest rate on a Treasury bond, without considering inflation. It is made of two components: the real yield/interest rate, which reflects the underlying return on investment (or the final price of risk to lend to the US government over time), and the inflation expectations, which is the market's estimate of future inflation (usually measured via specific inflation-linked Treasury instruments, called TIPS).

Economic implicationsReal yields can be seen as a proxy for expected economic growth. Higher real yields can suggest stronger economic growth expectations, while lower real yields might indicate weaker growth (or even recessionary concerns).

Market implicationsReal yields help investors understand the true risk of an investment in US Treasuries, after inflation. If inflation is high, a nominal yield might look appealing but the real yield will show the investor is actually losing purchasing power. On the contrary, a higher real yield with a lower expected inflation will make the US Treasury more appealing to investors.