It's not just about eurozone bonds

2 min read
Divyang Shah

We are seeing a continuation of the move higher on eurozone bond yields across the board but it would be a mistake to think of this as just a position unwind impacting the eurozone bond market, as US Treasuries and Gilts are also tagging along for the ride.

US 10-year yields have broken through their 200-day MA while the 10-year Gilt yield is firmly above 2.00%. Since the April 17 low, 10-year Bund yields are close to 50bp higher, while yields on 10-year US are just under 45bp higher and Gilts just under 40bp higher.

Bunds have underperformed but not to a very large extent given the absolute move on 10yr yields. We have seen a move higher on inflation breakeven/swap rates that has mirrored the stability and subsequent move higher on oil. Brent has now recovered from trading under US$50 in January to around US$68.50.

Oil

10-year and Oil

Source: Reuters

Swaps

Eurzone inflation swaps and oil

Source: Reuters

This movement higher on inflation expectations has been behind the correlated nature of higher bond yields, with the underperformance of Bunds being related to an unwinding of excessive QE expectations.

This underperformance has seen the 10yr US/DE spread come in from over 180bp down to just under 165bp.

Divyang Shah
10-year and Oil
Eurzone inflation swaps and oil