Spanish Yields Below America’s as Rally Breaks New GroundDave Liedtka
Bonds are showing the challenges central bankers face when it comes to creating sustainable economic growth amid persistent low inflation.
Fixed-income markets from the U.S. to Spain are rallying even after more than five years of efforts since the 2008 global financial crisis by the Federal Reserve and the European Central Bank failed to produce enough of an increase in consumer prices counted on to spur economic output.
Europe’s most indebted nations can now borrow as cheaply as the U.S. government. Treasuries are gaining today even with the Labor Department saying employers in the U.S. boosted payrolls in March and the unemployment rate held at 6.7 percent while more Americans entered the labor force. Hourly wage growth was unchanged last month, indicating few inflationary pressures.
“Inflation is really no threat,” Pacific Investment Management Co.’s Bill Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Michael McKee. “And policy rates, which they are basing on inflation and the core PCE, probably is not a threat either.”
Europe appears to be experiencing what International Monetary Fund officials are calling lowflation. A period of ultra-low, albeit rising, inflation still has the potential to destroy output, hurt hiring and revive memories of the fiscal crisis by hammering the ability of governments to repay debts.
While stronger sovereign-debt markets are a plus, the gains also work against efforts by policy makers from Fed Chair Janet Yellen to ECB President Mario Draghi to drive investors from traditional refuge securities and put more money to work in their respective economies.
Yields on the Spanish notes fell below those of their U.S. equivalents today for the first time since 2007. The Iberian country’s rate was more than 7 percentage points above its U.S. counterpart in 2012, before Draghi pledged to protect the euro, allaying concern the currency bloc would splinter.
Government bond yields from Ireland to Italy fell to records today on speculation that inflation at a four-year low will push the ECB to expand stimulus measures. Draghi said yesterday officials have discussed further options, including asset purchases, or quantitative easing.
Even though Fed policy makers are slowing their own QE purchases and debating when interest rates will rise, bond investors are having trouble weaning themselves from what’s considered the world’s safest securities.
Treasuries rose the most today since January as the below-forecast 192,000 increase in employment eased concern that the Fed will accelerate the unwinding of monetary stimulus.
Hourly wage growth was unchanged in March, trailing the median estimate for a 0.2 percent gain in a Bloomberg survey of economists.
Yields on five-year notes dropped the most in two months, widening the gap with 30-year bonds to 1.89 percentage points. The yield curve, which investors view as a barometer of growth expectations, had flattened to the least since 2009 last month after the Fed signaled that a strengthening economy may prompt policy makers to raise rates sooner than forecast next year.