• Treasuries fall in U.S. hours after gains in European trading
  • Pattern comes with ECB expected to add to stimulus next week

When Frankfurt’s bond traders get to their offices, the world has suddenly been turning into a gloomier place than when their U.S. colleagues called it a day about 10 hours earlier.

In four of the past five trading sessions, demand for the world’s haven asset, 10-year U.S. treasury notes, has risen during European hours and then fallen as U.S. trading ramped up, according to data compiled by Bloomberg. For Jim Vogel, head of interest-rate strategy at FTN Financial, it shows U.S. investors are betting global woes won’t derail the nation’s economic recovery, while across the Atlantic, traders aren’t so sure European Central Bank efforts to stoke growth and inflation will work, supporting demand for safety.

American optimism and European pessimism may be put to the test next week as expectations build that the ECB will pile on even more stimulus to spur the region’s flagging recovery. At the same time investors are betting the Federal Reserve will judge the U.S. economy strong enough to raise interest rates two weeks later.

European investors are saying, "we’ve had stimulus for years and the economy still is not where it needs to be," Vogel said by phone from Memphis, Tennessee. "The faith you’re going to have a sufficient response to monetary stimulus can be different overseas than it is domestically."

Policy Divergence

In the past week, demand for safety has won out among 10-year Treasury investors. Yields slipped four basis points, or 0.04 percentage point, to 2.22 percent, according to Bloomberg Bond Trader data. The two-year security sold off over the same period, with yields climbing to 0.92 percent. That pushed the yield premium in U.S. two-year government bonds over similar-maturity German debt to the most since 2006.

The divergence comes with the ECB expected to push its deposit rate to -0.3 percent from -0.2 percent at its Dec. 3 meeting, according to the median estimate of a Bloomberg survey. That would make an extra $373 billion of securities available for the bond-buying program the central bank is already pursuing.

Japan’s central bank is also undertaking a stimulative asset purchase program while the People’s Bank of China has lowered its benchmark interest rate fives times this year to reverse its own slowdown.

The Fed meanwhile wrapped up its own bond buying last year and futures traders are now pricing in a more than 70 percent chance for it to raise its benchmark rate next month for the first time in almost a decade. The calculation assumes the effective federal funds rate will average 0.375 percent after liftoff. Those expectations pushed the yield on the two-year treasury note to the highest in more than five years earlier this month.

For FTN’s Vogel, continued demand from worried Europeans may limit how high those yields will climb.

"Our perspective, and we think that of overseas investors, is that treasuries are going to remain attractive against other currencies and other fixed income assets even though the Fed is going to be raising rates," Vogel said. "From an overseas perspective there’s the potential cushion that even as the Fed raises rates Treasuries hold more value than other possibilities."

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