Europe's Yield Curve May Hold Key to Markets in 2018

There's a lot of discussion these days about the U.S. bond market's yield curve, or more specifically how it has shrunk to the narrowest levels since 2007 -- a movement that has historically presaged an economic slowdown. What hasn't been talked about as much is how Europe's yield curve has failed to follow the same path. And while there are strong signs that may soon change, the result could end up being positive for Europe's economy and financial markets.

In the past, the slopes of the U.S. and European curves, as measured by the difference between five- and 30-year bond yields, often moved in tandem because central bank policies tended to be closely linked. But in the aftermath of the financial and euro-zone debt crises, the link was broken and the yield curves diverged. Now, it seems more likely that Europe's curve may start narrowing as the European Central Bank reduces its asset purchase program and moves closer to raising interest rates for the first time in more than five years.