German Two-Year Yields Are Below U.S. Peers by Most in a Decade

  • Short-term yield ‘probably fairly anchored in Europe’: Danske
  • Fed officials keep prospect of rate hike in 2016 alive

For all the talk of the European Central Bank tapering its monetary stimulus, shorter-maturity German government bonds are signaling the accommodative policy will continue.

The yield premium investors earn for holding two-year Treasuries over similar-maturity German bunds widened to the most since July 2006, indicating traders see U.S. rates rising sooner than European. While reports this week speculating on a paring of ECB stimulus weighed on the region’s bonds, the spread signaled that the policy-divergence view regarding the Federal Reserve and the ECB is still intact. Shorter-dated bonds are more sensitive to the outlook for monetary policy than longer maturities.

Across the Atlantic, prospects of a U.S. rate hike grew after Chicago Fed President Charles Evans signaled Wednesday that one increase by year-end is likely if economic data continues to improve, while Richmond Fed President Jeffrey Lacker said he saw a case for raising rates.

Divergence Seen

“Even if the ECB would start tapering, it would take a long time before they would start touching interest rates in the short-end,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The two-year is probably fairly anchored in Europe. With the Fed, it looks like we are setting up for a hike in December.”

German two-year yields were little changed at minus 0.68 percent as of 9:18 a.m. in London. The price of the zero percent bond due in September 2018 was 101.314 percent of face value. The yield spread compared with similar-maturity Treasuries climbed to 1.51 percentage points, a decade-high on a closing basis.

Even amid skepticism that tapering was imminent, reports earlier this week on how the ECB may wind down its quantitative-easing program triggered a slide in the region’s longer-maturity bonds, which were already weighed down by fresh supply.

“The long-end in Europe is sensitive to these tapering talks clearly because the search for yields and flattening of the curve is very much related to the ECB buying and investors being forced further out on the curve,” Danske’s von Mehren said. The policy divergence story is still strong and “if anything the spread could move wider.”

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