Government bond yields fall as investors grapple with muddy economy
Government bond yields in the US and Europe end the week on a lower note, with investors seeking safety after a few days of volatility in stocks, bonds and cryptocurrencies.
The outlook for interest rates has been clouded by recent strong inflation data, which supports higher rates, meeting negative surprises in economic activity, which augur weaker ones. This created uncertainty among investors ahead of the Federal Reserve and European Central Bank interest rate meetings in June.
Economic forecasters have been caught off guard by the recent data releases, which suggests they have been overly optimistic about the success of the US reopening. Citigroup’s U.S. Economic Surprise Index, which measures whether or not this data is exceeding expectations, is set to turn negative for the first time in nearly a year.
Yields on 10-year US Treasuries slipped on Friday and are lower for the week at 1.625%, from 1.635% at the end of last week, according to Tradeweb. German 10-year government bond yields touched minus 0.139% on Friday, before rebounding slightly to minus 0.130%, which is down from last Friday’s close of minus 0.122%.
European yields had risen sharply at the start of the month, with Germany now the only eurozone economy to have negative yielding 10-year bonds.
Simona Gambarini, market economist at Capital Economics, thinks the returns may have exceeded. “Investors are now overestimating the extent and speed of monetary policy tightening in the euro area,” she said.
On Friday, the German purchasing managers’ index survey of manufacturing activity was lower than expected, although it still shows a recovery. European consumer price inflation released on Wednesday was 1.6% in April, indicating a strong recovery in prices, but core inflation excluding volatile food and energy prices was lower expectations at 0.7%.
Price pressures are building up due to global supply chain issues as economies get back to work. Morgan Stanley analysts, however, do not expect a reduction in bond purchases by the ECB at its next meeting. Vaccines are less than half of the EU target and the common European fiscal stimulus program is still not operational.
In the United States, inflation numbers have been strong and the minutes of the last Fed meeting released on Wednesday showed there had been talk of slowing bond purchases – also known as name to type talk.
At the same time, housing starts disappointed Tuesday, while the University of Michigan consumer sentiment survey disappointed late last week.
Mark Carbana, U.S. rate strategist at Bank of America, still expects U.S. rates to rise further, especially if there’s a good reading of the Fed’s preferred measure of inflation, spending by personal consumption, which is due out next Friday.
“The uncertainty around inflation is the highest in decades,” he said, particularly on whether the recent high readings are temporary or due to changes in the under-economy. underlying.
He expects T-bill yields to rise in the second half of the year, pushed up by higher yields on inflation-protected T-bills as the Fed begins to talk more seriously about cutting its bonds. bond purchases.
Write to Paul J. Davies at [email protected]
Corrections and amplifications
The University of Michigan consumer opinion survey disappointed at the end of last week. An earlier version of this article incorrectly said that the investigation had also disappointed earlier this month. (Corrected May 21)
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