U.S. Yield Over Germany Approaches Nine-Year High Before ECB

  • Two-year yield premium widened to 146 basis points this week
  • ECB will cut interest rate Thursday, swaps yields indicate

Treasury two-year notes yields offered almost the widest spread compared with their German counterparts in more than nine years as investors braced for the European Central Bank to cut interest rates at a meeting Thursday.

With German two-year yields at minus 0.55 percent, similar-maturity Treasuries hand investors a premium of 144 basis points. The spread widened to 146 basis points earlier this week, which was the most since July 2006. The U.S. plans to auction $12 billion of 30-year debt after a sale of 10-year notes on Wednesday saw the lowest demand in seven months.

The divergence highlights the different paths the ECB and the Federal Reserve are taking. Investors expect the ECB to announce a 10 basis-point deposit-rate cut on Thursday from the current minus 0.3 percent, based on yields in the market for interest-rate swaps. The central bank may also increase or extend a program of debt purchases it uses to put downward pressure on yields, according to a Bloomberg survey of economists. The Fed raised its benchmark in December and indicated it plans to do so again in 2016.

“Over the next few months, the two central banks will go in the opposite directions,” said Hiroki Shimazu, the senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest lender. “German bonds may do much better than U.S. Treasuries. Most people think the ECB will try to use much easier monetary policies.”

Benchmark Treasury 10-year yields fell one basis point, or 0.01 percentage point, to 1.87 percent as of 6:37 a.m. New York time, according to Bloomberg Bond Trader data. The 1.625 percent note due February 2026 rose 3/32, or 94 cents per $1,000 face amount, to 97 26/32.

Fed Hikes

“I am in the camp that we will see policy divergence, we will see more policy divergence than currently priced in,” Michael Krautzberger, head of euro fixed-income at BlackRock International Ltd., said on Bloomberg Television’s “On The Move” with Guy Johnson. “I would agree the market is slightly under-priced in the U.S. just pricing around two rate hikes until the end of 2017.”

Krautzberger said he expects the Fed “in a normal scenario, to deliver more than two rate hikes until the end of next year, given the very robust environment.”

Treasuries have returned 3.1 percent over the past year, versus 0.9 percent for German debt and 0.5 percent for euro-zone securities, according to the Bloomberg World Bond Indexes.

The U.S. Treasury Department sold $20 billion of 10-year notes on Wednesday at a yield of 1.895 percent. The bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, fell to 2.49, the lowest since August 2015. A sale of three-year debt on Tuesday saw the weakest demand since 2009. The 30-year bonds scheduled to be sold Thursday yielded 2.66 percent in pre-auction trading.

Before it's here, it's on the Bloomberg Terminal.