Treasuries across the globe have in been in growing demand recently as investors are becoming increasingly worried about the monetary outlook on both side of the Atlantic. US yields have been moving within a downtrend channel since the beginning of the summer. US 10-year rate slid as much as 20bps, from 2.395% down to 2.20% as investors discounted a hawkish unwinding program for Janet Yellen. The 2-year rate fell 13bps to 1.30%. Similarly, Germany’s benchmark 10-year government bond yield lost 22bps to 0.40%, while the 2-year rate gave up 16bps and returned to -0.71%.
However, it seems that the rush for bonds is coming to an end as even the recent risk-off move failed to send yields lower. We are therefore ahead of a recovery in treasury yields, especially in the euro zone and the US. Given the fact that investors will most likely get rid of EU and US bonds at the same time, the effect on EUR/USD will be hard to predict. Nevertheless, the situation is quite different from that of commodity exporter countries such as Australia, New Zealand and Canada. Indeed, the spread has widened during the entire summer. A contraction of the interest rate differential would add incentive to sell those currencies as yield hungry investors reallocate their portfolios.
By Arnaud Masset