Bond Divergences: ECB Under Pressure from Fed
The European Central Bank (ECB) is under pressure to cut interest rates for the third time this year, prompted by the surprise 50 basis point cut announced by the U.S. Federal Reserve (Fed) in September. Although the ECB had planned to wait until December to make another cut, recent economic data, such as weak PMIs and falling inflation in the Eurozone, have forced its hand, making an October cut inevitable. As the Fed slows its cutting cycle, the ECB seems trapped with no choice but to press ahead, despite the risks of further euro depreciation and rising inflationary pressures. The divergence between the monetary policies of the two central banks also reflects a widening gap in bond markets.
In this context, the gap between US and German bonds continues to widen. US 10-year bond yields have risen sharply, while in Germany the increase has been minimal, reaching a gap of 183 basis points, the widest since July. According to Goldman Sachs, this gap could reach 200 points in the coming months, driven by solid growth in the US economy, while the eurozone continues to struggle with weakness in Germany and France. This has led more investors to opt for U.S. bonds, exacerbating pressure on the ECB to lower rates.
Elsewhere, in Asia, bond inflows declined in September, with a net total of $4.99 billion, well down from $14.09 billion in the previous month. This slowdown reflects investor caution about possible Fed rate cuts and uncertainties related to the US elections. However, the inclusion of Asian bonds in global indices could revitalize inflows in the future as investors seek new opportunities in the region.
Looking at the performance of US, German and Eurozone 10-year bonds, we can note that the first two have followed relatively similar candlestick trajectories, while the Eurozone bond has experienced greater fluctuations and volatility. This has generated significant disparities, including relevant price gaps in mid-July. If we compare the US bond, which currently trades at 4.038%, with the German bond, which stands at 2.208%, we see that, although Germany is trying to keep pace with the US, Europe is not helping to boost German bond yields. In fact, the Eurozone bond appears to be moving steadily in the opposite direction to the other two. It will be interesting to see whether the German bond continues to replicate the performance of the U.S. bond or whether it starts to correlate with the U.S. bond.
In summary, central banks in Europe and the US are on divergent paths, which is reflected in the bond market, with the ECB facing difficult decisions and global investors readjusting their strategies depending on monetary policy and geopolitical uncertainties.
Ion Jauregui - ActivTrades Analyst
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The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acing on the information provided does so at their own risk.
In this context, the gap between US and German bonds continues to widen. US 10-year bond yields have risen sharply, while in Germany the increase has been minimal, reaching a gap of 183 basis points, the widest since July. According to Goldman Sachs, this gap could reach 200 points in the coming months, driven by solid growth in the US economy, while the eurozone continues to struggle with weakness in Germany and France. This has led more investors to opt for U.S. bonds, exacerbating pressure on the ECB to lower rates.
Elsewhere, in Asia, bond inflows declined in September, with a net total of $4.99 billion, well down from $14.09 billion in the previous month. This slowdown reflects investor caution about possible Fed rate cuts and uncertainties related to the US elections. However, the inclusion of Asian bonds in global indices could revitalize inflows in the future as investors seek new opportunities in the region.
Looking at the performance of US, German and Eurozone 10-year bonds, we can note that the first two have followed relatively similar candlestick trajectories, while the Eurozone bond has experienced greater fluctuations and volatility. This has generated significant disparities, including relevant price gaps in mid-July. If we compare the US bond, which currently trades at 4.038%, with the German bond, which stands at 2.208%, we see that, although Germany is trying to keep pace with the US, Europe is not helping to boost German bond yields. In fact, the Eurozone bond appears to be moving steadily in the opposite direction to the other two. It will be interesting to see whether the German bond continues to replicate the performance of the U.S. bond or whether it starts to correlate with the U.S. bond.
In summary, central banks in Europe and the US are on divergent paths, which is reflected in the bond market, with the ECB facing difficult decisions and global investors readjusting their strategies depending on monetary policy and geopolitical uncertainties.
Ion Jauregui - ActivTrades Analyst
*******************************************************************************************
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acing on the information provided does so at their own risk.
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