The I's Have it For European Bonds

Helpful central banks and weaker growth prospects give Europe a different outlook than the U.S.

Next year will show whether the recent global rout in fixed income is the end of an era, or merely a bad patch.

Bond markets got hammered as President-elect Donald Trump's spending plans looked set to kick up inflation, as Gadfly pointed out Thursday. But not all regions reacted the same way. In Europe, a slower pace of recovery and ever-helpful central banks have shielded bonds from the worst of the pain, compared to the U.S.

Sparing the Core

Ten-year bonds of some big euro area issuers, and the U.K., weren't hit as badly as the U.S. after Trump's election spurred inflation concerns

Source: Bloomberg

Normalized prices of current 10-year bonds from Nov. 9.

Yields look like they're broadly headed higher next year, but there are differences across countries on how bad the damage will be. And it's surely a relief that German rates will move further away from their negative stretch toward the end of 2016.

Bonds Step Up In 2017

European and U.S. 10-year yields should climb, according to the median estimate of analysts' forecasts

Source: Bloomberg

Though this was one of the more trying years for investors, it wasn't bad news for everyone. Who would have guessed at the start of 2016 that Greek bonds would be the big winner? Investor optimism on debt relief, along with strengthening economic data, helped them rally.

Greece, the Top European Performer of 2016

Progress on debt and signs of economic recovery helped yields shrink relative to Germany. Spread performance this year against the 10-year bund:

Source: Bloomberg

Note: Data as of Dec. 21

The country's economy is far from out of the woods, of course. But that's not all.

There's also Italy. Its debt lost ground in 2016 as officials struggled to put their banking system on stable footing -- Banca Monte dei Paschi di Siena SpA is far from the country's only troubled lender. The country is the world's third-largest debtor, and investors will be justified in demanding higher yields until they see that it's got to grips with its banks' bad loans.

Fixing that problem may, though, take longer than a year.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Jennifer Ryan in London at jryan13@bloomberg.net
    Elaine He in London at ehe36@bloomberg.net

    To contact the editor responsible for this story:
    Edward Evans at eevans3@bloomberg.net

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