All Eyes on Fed After ECB Juices Up Bond Yield Divergence Trade
- Widening yield gap between Europe, U.S. complicates ECB’s job
- Fed may need to be more ‘forceful,’ Natixis’s Dwek says
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The European Central Bank’s promise to “significantly” boost the pace of bond purchases is threatening to turbo-charge a yield divergence with the U.S. that could drive money out of Europe, unless the Federal Reserve ramps up its commitment to ease policy next week.
The gap between yields on Treasuries and their German peers is already at its widest level since before last year’s pandemic meltdown in markets, reflecting the contrast between U.S. economic resilience amid a rapid vaccine rollout and Europe’s sluggish recovery. Now, strategists are warning it could widen further after the ECB pledged to ramp up the pace of quantitative easing over the next quarter, capping a nascent rise in debt yields.