Thursday, May 8, 2014

Yields Plunging in Europe (excerpt)

More surprising than the rally in US Treasury bonds is the plunge in Eurozone government bond yields, especially in the peripheral countries. The German and French yields are both back below 2.00% at 1.37% and 1.94%, respectively. The Italian and Spanish yields are at 3.02% and 2.98%, respectively, with the Italian yield down 108bps ytd and 140bps since the start of last year; the Spanish yield is down 116bps and 220bps over the comparable time periods. They were both around 7.00% during the summer of 2012. To global bond investors, US Treasury yields of 2.50%-3.00% must be very attractive given how low rates have fallen in the Eurozone.

The plunge in Eurozone yields reflects mounting concerns about deflation in the region. The Eurozone’s core CPI inflation rate has dropped from a recent high of 1.7% y/y during July 2012 to 1.0% during April of this year. Inflation is also low in the US with the core PCED up 1.2% y/y during March, down from a recent high of 2.0% two years ago. Interestingly, the expected inflation rate implied by the 10-year TIPs yield has remained remarkably stable around 2.2% since mid-2013.

Today's Morning Briefing: Vagabonds & Vigilantes. (1) QE tapering: Bonds were sold on the chatter, bought on the news. (2) A range-bound forecast. (3) Bond Vigilantes want to know: “Who are those masked vagabonds buying bonds?" (4) New pension fund rules in Budget Act of 2013. (5) Portfolio rebalancers. (6) Individuals are back. (7) Fed isn’t done buying just yet. (8) Yields plunging in Eurozone. (9) Inflation remains subdued, and global growth is slow. (10) NZIRP for the foreseeable future. (11) Yellen is watching “disappointing” housing activity. (12) Bonds displacing gold as the new safe haven. (More for subscribers.)

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