Since Election Day, the focus in the U.S. Treasury (UST) market has been essentially domestic-driven. In other words, market participants have been setting their sights on potential fiscal policy developments and, of course, the latest actions from the Federal Reserve (Fed). However, as the calendar turned to summer, investors were greeted with a new twist for Treasuries—more-hawkish-than-expected rhetoric coming from other developed markets’ central banks, elevating global bond yields in the process. The question that lies ahead on the rate front is whether words become deeds; if so, the fixed income arena could be in for a case of summertime blues.
Two of the more noteworthy developments from the global central bank perspective involved the European Central Bank (ECB) and the Bank of Canada (BOC), each occurring in just the last few weeks. The genesis was at an ECB forum in Sintra, Portugal, where President Draghi made remarks that the bond market viewed as being on the hawkish side. Although the ECB tried to walk back the comments, stating they were misinterpreted, the damage was done, and yields nevertheless finished higher. Interestingly, the FOMC minutes released last week were a nonevent, but the ECB minutes were a different story, as the headlines stated that policy makers “discussed removing the easing biases in their policy communication,” specifically on their Quantitative Easing (QE) program. These news events were accompanied by earlier comments from BOC president Poloz that intimated that Canadian policy makers may be considering a rate hike at one of their upcoming meetings.
U.S. 10-Year vs. 10-Year German Bund
Needless to say, the shift in tone was not expected in the global bond markets. In the eurozone, 10-Year German bund yields have risen more than 30 basis points (bps) since June 26 and are now at their highest levels since January 2016. From a technical perspective, as of this writing, the 10-Year bund was just 1 bp below its one-year 100% retracement level. Along the same lines, UK and French 10-Year yields were also up at least 30 bps during this time frame, with Italian 10-Year rates posting an increase of nearly 45 bps. On this side of the Atlantic, CAD 10-Year yields now reside at two-year highs, and the implied probability for a rate hike at tomorrow’s policy meeting has risen to 94.7% versus 34.9% on June 26.
