Why Global Markets Are Still Far From Normal
The widening gap in a key bond trade is one piece of evidence, which also highlights the puzzle of the weaker dollar
By Richard Barley
LONG DISTANCE
Gap between U.S. and German 10-year yields
The world has felt more normal in recent months, in economic terms at least, with global growth robust and inflation, not deflation, the worry. But things are still far from settled. The widening gap in a key bond trade is one piece of evidence, which also highlights the puzzle of the weaker dollar.
At 2.28 percentage points, the spread between U.S. and German bond 10-year yields is close to the 2.32-point peak of 2016, itself a level not seen since before the Berlin Wall fell in 1989. Before the global financial crisis, the spread was narrower as the U.S. and European economies—and hence monetary policy—tended to move more in tandem. This has been replaced by a vast gulf.
CATCH-UP
Change from a year earlier in gross domestic product
Lately, Treasury yields have opened the gap again; German yields look puzzlingly low for a world where the outlook is brighter.
One explanation may be that the U.S. economic cycle is more advanced, meaning inflation is more of a concern than in Europe. It also means some are concerned the U.S. might tip into recession sooner rather than later: A U.S. slowdown will hurt everywhere. Global bond yields, like the bund, should remain low if growth is a concern.
BORROWING BUST
Budget balance as a percentage of gross domestic product
Another factor is that the European Central Bank is still in the earliest stages of removing stimulus, having yet to stop bond purchases. Its deposit rate is still negative and a first increase is only expected in 2019. ECB policy ensures short-term yields don’t move too much, which limits the ability of long-end rates to rise. That, plus a steeper yield curve, may make bunds relatively attractive for conservative investors, since the ECB is reducing volatility.
The renewed widening in the rate differential across the Atlantic also raises anew the question about why the dollar has weakened against the euro. A factor worth considering lies in fiscal rather than monetary policy. A higher U.S. budget deficit needs an offset: both higher yields and a weaker dollar are part of that. The eurozone, meanwhile, isn’t about to go on a budget splurge.
What are investors to do? In the longer term there is clearly room for German yields to rise given their low level. But for now, the focus is on the U.S. where rates are moving faster. The gap could get wider still.
0 comments:
Publicar un comentario