Europe Is Being Battered by the US Bond Hurricane

European bond markets are staggering into the fourth quarter, having briefly reached the highest 10-year yields for a decade. But with no apparent home-grown trigger, this yield surge is more likely the result of ill-winds coming from across the Atlantic and battering everything in their path.

While Italy and France have posted some concerning budget deficit estimates, there is nothing novel in Europe’s economic backdrop. What’s different now is the relentless climb of US Treasury yields and the strength of the greenback. The dollar index has gained 6% versus a basket of world currencies since mid-July, with 10-year US yields rising 75 basis points over the same time. Europe is powerless to resist these forces, especially when crude oil is uncomfortably close to $100. Despite some promising inflation data, with core prices increasing at the lowest for a year, there are fewer compelling reasons to be invested in euro or sterling assets when the dollar is this strong.