Notes From the Desk: Canary in the ECB Coal Mine?
January 9, 2018 By Sage Advisory
Bond market observations from the Sage portfolio management team.
The recent shift higher in front-end rates domestically was felt abroad, as well. U.S. 2yr Treasuries have risen nearly 30bps since the beginning of November. In that same timespan, German and French 2yr yields have risen by approximately 10bps. The trend towards tighter monetary policy is not isolated to the United States, as Mario Draghi and the ECB will continue removing accommodation through 2018 with an expectation their quantitative easing program will end in September 2018. Sovereign yields responded accordingly by drifting higher.
Something else that caught our attention is how the real yield story is evolving domestically and abroad. Looking at the differential of US and German 5yr real yields vs. the Euro shows how currency moves are tracking real yields. As German real yields have shifted lower over the last year and U.S. real yields have moved higher, the Euro has strengthened. This currency strength could be signaling investors’ anticipation of higher sovereign real yields.
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