Five charts to start your day

Institutional investors are pivoting to European government bonds

Institutional investors are voting with their wallets, and the ballot box is Europe. The yield spread between Uncle Sam’s Treasuries and Germany Bunds tells a story of confidence that cooler inflation in Europe will allow the ECB to start cutting interest rates sooner than the US Federal Reserve.

Indeed, Europe’s headline inflation appears more chilled than the hot inflation reports out of the US in recent months. The Financial Times has reported that Pimco and T Rowe are betting that the ECB will cut the ribbon on rate reductions ahead of the Fed.

Subsequently, this has had an impact on the gap between US and German borrowing costs, which you can see in the chart below. It’s rising again, confirming that this pair trade is currently taking place.

Overall, government bonds on both sides of the Atlantic have sold off, but the US is now feeling the sell-off more as there appears to be more evidence of inflation correcting itself in Europe. Furthermore, conviction about an ECB rate cut in June remains high, while recent strong US data had caused the Fed to backpedal from rate cuts, reducing expectations that this will happen any time soon.

Source: Financial Times

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