US Gov't Bonds Yield More Than Developed Countries For 1st Time in Two Decades
|US Treasury yields are rip-roaring vs other developed countries. The bet is on inflation.
Which is it: Faster growth or higher inflation?
That's the question people are asking as US Government Bonds Pay More Than Debt From Other Developed Nations.
Analysts said the rise in yields in part reflects optimism about the U.S. economy and expectations for a pickup in inflation, which threatens the value of government bonds by eroding the purchasing power of their fixed payments. A market-based measure of expectations for annual inflation over the next 10 years, known as the break-even rate, recently reached its highest levels since 2014.
“The U.S. has the highest rates of everyone in the G-10 and it looks like the rate differential will continue to widen,” said Chris Gaffney, president of EverBank World Markets. “The U.S. seems to be going it alone in this rising interest-rate path.”
At the same time, economic data throughout much of the world has failed to meet expectations, eroding support for bets that the euro, yen and other currencies would rise versus the dollar. While investors speculate about the Fed increasing its pace of monetary tightening, they have also reduced their expectations for tighter monetary policies in Australia, Canada, the U.K., Japan, the euro-zone and other economies.
Higher Treasury yields are pushing investors back to the dollar, after they crowded into bets that the euro would rise versus the U.S. currency. As economic data has weakened in Europe, pushing yields down even as monetary policy remains accommodative, signs of employment and inflation growth U.S. have persisted, lifting Treasury yields higher. That shift has squeezed some investors, leading many to exit the trade.
Investors say they are also looking at the yield differential because the gap has made it increasingly expensive for money managers in Europe and Asia to buy U.S. government and corporate bonds. Those investors are increasingly looking instead to buy debt in Europe, where hedging costs are not a problem. This dynamic could make borrowing more expensive for U.S. consumers and businesses, and act as a check on growth.
2007 Decoupling Theory in Reverse
This reminds me of the widespread decoupling theory of 2007, except in reverse.
The idea then was the US was headed for the gutter and the rest of the world was about to lift off, led by China.
Today, analysts have latched on to the equally preposterous idea that the US can avoid a slowdown in China, Europe, and the the rest of the world.
Get a Grip on Reality!
Start with Reflections on Late-Stage Inflation.
Also consider Earnings Estimates: Yardeni Asks "What are Analysts Smoking"?
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.