The yield on US Treasury bonds has soared to a 15-year high, but it has not significantly impacted European government bonds, reflecting investors' expectations that economic growth and financing needs in the Eurozone are increasingly lagging behind the United States.
Since the second quarter, US economic data has shown strong performance, leading financial markets to generally expect the Federal Reserve to maintain higher interest rates for a longer period, pushing yields across all maturities of US Treasury bonds to multi-year highs. Moreover, the cost of borrowing in the US, adjusted for inflation (real interest rates), has risen above 2% for the first time since 2009, elevating global financing costs and negatively affecting the performance of risk assets such as the stock market.
However, European government bond yields have not been affected by the US. Mauro Valle, head of fixed income at Generali Investment Partners, said that recent US economic performances indicate it is moving away from recession concerns. In contrast, economic data from Europe, especially the core European countries, shows a deteriorating economic outlook.
The divergent performance of government bond markets reflects different economic conditions and interest rate expectations between Europe and the US. Although the yield on US 10-year Treasury bonds has fallen to some extent, its recent increase not only surpasses the yield on British 10-year government bonds but also far exceeds the yield on German 10-year government bonds.
Short-term government bond yields, more sensitive to interest rate expectations, can more accurately reflect economic and interest rate differences between Europe and the US. Weighed down by weak data-triggered pauses in interest rate hikes by the ECB, yields on short-term German government bonds fell significantly in August, while yields on short-term US government bonds were relatively stable.
Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, noted that the "exceptional performance" of US Treasury yields not only highlights the stronger economic performance of the US compared to other economies but also suggests that interest rate levels in the US may further exceed those in other economies.
The differentiation in government bond markets, apart from economic prospects and interest rate expectations, another critical factor is the fiscal outlook. Influenced by mechanisms related to the Eurozone and opposition from its member states, the Eurozone has maintained a cautious fiscal policy. In contrast, since the subprime crisis in 2008, the US has pursued an expansionary fiscal policy, leading to a steadily increasing fiscal deficit.
To bridge the fiscal gap, the US Treasury has maintained a steady issuance of Treasury bonds, and an increased supply of these bonds tends to lower their prices, raising their yields. Fitch Ratings expects the US fiscal deficit as a percentage of GDP to rise from 3.7% in 2022 to 6.3% this year, and to 6.6% next year. The agency withdrew the US's AAA credit rating in early August, citing fiscal pressures.
Major institutions such as Bank of America, Goldman Sachs, and Barclays anticipate that strong US economic data may prompt the Fed to raise interest rates far beyond market expectations. This would not only further increase yields across all maturities of US Treasury bonds but also continue to elevate financing costs in other regions.
Furthermore, the surge in US Treasury bond yields could also affect the policies of other central banks. Senior interest rate strategist Ataru Okumura of SMBC Nikko Securities said that the rise in US Treasury bond yields makes it difficult for the Bank of Japan to control the depreciation of the yen by managing the interest differential between the US and Japan.
