Treasury Premium Over Bunds at One-Month High on ECB Easing Bets

  • Draghi comments spur speculation of more stimulus this year
  • Ten-year Treasury yields stuck at 2% as Fed seen sidelined

Investors may not see the Federal Reserve raising interest rates until next year, but speculation of more stimulus from the European Central Bank has succeeded in pushing the yield premium on 10-year Treasuries to an almost one-month high over German bunds.

The gap in yields between the benchmark notes grew to as much as 1.55 percentage points on Thursday, the widest since Sept. 25, after ECB President Mario Draghi said policy makers wanted to be “vigilant” on monetary policy. Markets took his remarks as a signal additional easing is coming as soon as December. Futures traders now predict the Fed will raise its benchmark rate in March.

“What Draghi said yesterday suggested a rate-divergence trade will continue to be an important strategy in the bond market,” said David Schnautz, a rates strategist at Commerzbank AG in London. “Draghi made it clear the ECB is ready to do more. While there’s a debate whether the Fed’s liftoff will take place this year,” investors still expect “its next move will be to tighten.”

The yield on the 10-year Treasury note rose three basis points, or 0.03 percentage point, to 2.06 percent as of 6:02 a.m. in New York, according to Bloomberg Bond Trader data, putting the spread with equivalent bunds at 1.54 percentage points. The price of the 2 percent U.S. security maturing in August 2025 dropped 7/32 or $2.19 per $1,000 face amount, to 99 1/2.

Stimulus Signal

Draghi said Thursday following a policy meeting in Malta that there was a “rich discussion” among officials about the instruments that might be used to expand quantitative easing and that the central bank will review the degree of monetary expansion at December’s meeting.

While futures traders have pared the odds of Fed liftoff in 2015 to 34 percent since the Federal Open Market Committee left the benchmark rate near zero last month, they see a 57 percent chance of a rate increase by the March meeting. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase, compared with the current zero-to-0.25-percent target range.

The market has all but dismissed the possibility of a move on Oct. 28.

The 10-year Treasury yield has hovered around 2 percent since the start of the month, and is set to rise about one basis point this week.

“We see risks that the Fed will lean hawkish at the meeting, in which case yields will likely rise but we do not expect a break to significantly higher rates or realized volatility as a result,” BNP Paribas SA analysts Timothy High and Daniel Tangho wrote in a research note dated Oct. 22. “Essentially, we expect this to perpetuate the range trade rather than break it.”

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