Aug 30 (Reuters) – A massive sell-off that pushed U.S. borrowing costs to 15-year highs kept euro zone bonds relatively unscathed in August, reflecting investor bets that economic growth and financing needs in the bloc will increasingly lag those in the bloc. United State.
A resilient US economy and growing borrowing needs pushed Treasury yields to their highest levels in more than 15 years in August amid growing expectations that interest rates will remain high for longer. Moreover, inflation-adjusted borrowing costs in the US rose above 2% for the first time since 2009, hurting stocks and driving up borrowing costs globally.
But European bonds were less affected and it is not hard to see why.
While the US economy, which grew by 2.4% in the fourth quarter, delivered a series of positive surprises, the sharp contractions in business activity last week indicated an exacerbation of economic pain in Europe.
“In the US, we have gone from year-end recession expectations to recent strong economic data,” said Mauro Valli, head of fixed income at Generali Investment Partners.
“In Europe, we went from a positive economic trend a couple of months ago to more negative data,” Valli said.
Bond markets reflect the two regions’ divergent economic fortunes and interest rate expectations.
Benchmark 10-year Treasury yields, although down from month-end highs, are still poised to end August up 17 basis points, while 10-year yields rose just 4 basis points in Germany, the benchmark for the eurozone. , and a difference of 11 basis points in Britain.
Last week, US 10-year Treasury yields touched their highest levels compared to German yields since December.
As for the interest rate-sensitive short-term German bund yields, German bund yields fell by 17 basis points in August, as weak data increased expectations that the European Central Bank would stop raising interest rates in September. In contrast, US equivalent bond yields remained flat during the month.
“This is not a global sell-off. It’s a US-centric sell-off,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, which manages $745 billion in assets. He said there is now more focus on individual economies and, for example, his company prefers British government bonds.
deficit hour
Significantly, borrowing needs also vary across the Atlantic, with the fiscal outlook deteriorating in the US and the Eurozone improving.
“Europe is not talking about fiscal consolidation, it’s fiscal consolidation,” said Rohan Khanna, head of euro interest rate strategy at Barclays.
Fitch Ratings, which stripped the United States of its AAA credit rating in early August due to fiscal stress, expects the US government deficit to rise to 6.3% of GDP this year and 6.6% next year, from 3.7% in 2022. .expand more after that.
In Germany, Fitch expects the deficit to rise to 3.1% of GDP this year from 2.6% last year, but narrow to around 1% over the long term. Likewise, you expect deficits to narrow in heavily indebted Italy and France.
Munther El-Tayeb Loret, fund manager at Fontel Asset Management, said that the decline in debt issuances in Europe compared to the United States will favor European government bonds over Treasury bonds.
Larger fiscal deficits lead to more borrowing, which leads to higher interest rates and lower bond prices.
extension and spread
Bank of America, Goldman Sachs and Barclays expect Treasury yields to end the year slightly below current levels. However, last week’s Jackson Hole Central Banking Symposium indicated growing concern that a strong US economy may force the Federal Reserve to raise interest rates further than markets now expect, which would lead to higher borrowing costs. elsewhere.
Khanna of Barclays estimates that German bund yields would have fallen by 50 to 60 basis points if they had been driven solely by domestic factors.
Frederic Ducrozet, head of macroeconomic research at Pictet Wealth Management, said the ECB should welcome this effect for now, as it helps it fight inflation by tightening monetary conditions.
The spillover effect from higher Treasury yields is a bigger challenge elsewhere.
In Japan, rising US yields pushed the yen to its lowest level in nearly ten months, and Japanese bond yields reached their highest levels in ten years, prompting the Bank of Japan’s recent intervention.
“Rising US yields are causing the yen to weaken, making it difficult for the Bank of Japan to contain yields through bond purchases,” said Ataru Okumura, chief interest rate strategist at SMBC Nikko Securities.
(Reporting by Yoruk Bahceli in Amsterdam; Reporting by Mohamed for The Arabic Bulletin) (Reporting by Chiara Elesi and Dara Ranasinghe in London, Junko Fujita and Kevin Buckland in Tokyo) Editing by Dara Ranasingh and Thomas Janowski
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