The gap between German and U.S. 10-year borrowing costs reached its widest point since April 2017 on Thursday after a higher-than-expected inflation print in the United States led to a sharp sell-off in U.S. Treasuries.
While investors also shed European government bonds on the data – bond markets in the world’s major developed economies tend to track each other as many investors switch between them – political risks kept a cap on yields.
The yield on 10-year U.S. Treasuries, which moves inversely to price, touched a fresh four-year high of 2.94 percent in European trade, after data on Wednesday showed consumer prices rose more than expected in the world’s largest economy in January.
This raises the pressure on new Federal Reserve chief Jerome Powell to prevent a possible overheating of the economy.
“The inflation data weighed on the U.S. Treasury market, and now you will have fiscal stimulus when the economy is running at full employment,” said Commerzbank strategist Michael Leister, referring to U.S. President Donald Trump’s $200 billion infrastructure spending plan.
“But in Europe the risks have become a bit more balanced and there’s still some demand for Bunds,” he said.
Though European bond yields have risen sharply since the start of December, this move has lost some steam as concerns around German coalition talks and an upcoming Italian election renewed the bid for “safe haven” bonds.
In addition, while most expect the European Central Bank to reduce extraordinary stimulus sooner rather than later, rate hikes are still a good distance away with a booming European economy yet to leave a lasting mark on inflation.
But while German 10-year government bond yields also rose after the release of the U.S. consumer price data – they were 3 basis points higher at 0.78 percent on Thursday – this was still below the recent 2-1/2 year high of 0.81 percent.
The “transatlantic spread” between U.S. and German 10-year government bond yields opened Thursday at 216 basis points, a level last seen ten months ago.
Most other euro zone government bond yields were also higher by 3-4 bps, partly driven upwards by large bond sales by Spain and France on the day.
The move towards higher yields across the euro zone has certainly boosted demand in some quarters, and this was on display on the French and Spanish auctions on Thursday.
France in particular was swamped with demand as investors put in enough orders to cover an 8 billion euro sale of bonds twice over, while Spain also generated strong demand, particularly for its shorter-dated debt.
“I have been watching to see at what point these positive yields on semi-core bonds start attracting international investors, and so for me this France result looks pretty interesting,” said Mizuho strategist Antoine Bouvet.
Spain’s bond auction result was also positive, especially given that Italy and Portugal have already conducted sales this week, he added.