Draghi Split From Yellen Drives Treasury Premium to 25-Year High

Mario Draghi and Janet Yellen are creating an opportunity in the bond market that investors haven’t seen for a quarter century.

Draghi may make it even more attractive on Thursday. That’s when the European Central Bank meets and may give more details about the ECB president’s plan to fight deflation by buying government debt in the euro region. The purchases will start this month, Draghi said in January.

Federal Reserve Chair Yellen meanwhile is considering raising interest rates. The result is that U.S. 10-year notes yield about 2.11 percent, versus 0.37 percent for German. The last time the difference was this much was May 1989. The divergence is “a key issue” for the bond market, Mohamed El-Erian says.

“Europe is going to be anchored pretty strongly by the QE, plus a sluggish economy, plus low-flation or deflation,” El-Erian, chief economic adviser at Allianz SE and Bloomberg View columnist, said on Wednesday in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “The U.S. much less so. So that relationship is absolutely key.”

Nations from Canada and Russia to China and Singapore are seeking to support their economies and keep prices from falling through monetary policies.

Benchmark 10-year Treasury yields fell one basis point to 2.11 percent as of 8:19 p.m. in New York, according to Bloomberg Bond Trader data.

Employment Report

Companies in the U.S. added 212,000 workers to payrolls in February, figures from Roseland, New Jersey-based ADP Research Institute showed Wednesday. The median projection of 46 economists surveyed by Bloomberg called for an advance of 219,000. The January reading was revised to 250,000 from a previously reported advance of 213,000.

The spread between shorter maturities is also widening. U.S. two-year notes yield about 0.67 percent, compared with minus 0.21 percent for their German counterparts. The U.S. premium of 89 basis points is the most in eight years.

While the ECB is sending yields plunging in the euro area, investors are preparing for the Fed to increase its benchmark as the U.S. economy improves. Yellen will probably raise the rate in about seven months, based on a Morgan Stanley index.

The yield difference between Treasuries and German bunds will widen to 198 basis points by the end of this year as U.S. 10-year rates climb to 2.58 percent compared with Germany’s 0.60 percent, according to median estimates of analysts compiled by Bloomberg News.

The unemployment rate in the euro area was at 11.2 percent in January, less than a percentage point from a record high of 12.10 percent reached in May 2013.

Bank of England

The Bank of England meets Wednesday and Thursday. A Bloomberg survey of economists projects policy makers will increase U.K. borrowing costs by the end of the first quarter of 2016.

British 10-year gilts yield about 150 basis points more than similar-maturity German bunds, the most since September.

German 10-year bunds will probably follow shorter maturities in the nation, pushing yields to negative levels, said Hideaki Kuriki, a debt trader in Tokyo at Sumitomo Mitsui Trust Asset Management, which oversees the equivalent of $40.6 billion.

“The bund yield will go under zero percent,” he said. “Investors will have to buy more high-quality and high-yield bonds. That’s Treasuries and gilts.”

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