It was easy to focus on elephant in the room last week as most of the US bond market weakness came in apparent response to Friday’s jobs report. But what if there was a dark horse–specifically a dark horse from Europe? With all the drama last week, it might be easy to miss the fact that EU bond yields rose roughly TWICE as much as US yields. It’s not necessarily an exaggeration to say US bonds were just waiting to price-in some more EU weakness until after the jobs report.
The following chart shows the relative change on the week for both US and EU 10 year yields (as a reminder, Germany’s 10yr yield is the closest thing to an “EU 10yr yield” as far as markets are concerned). Notice the leap in EU yields on Thursday while US yields waited for Friday’s jobs report.
When we zoom out to a wider view, we can see the phenomenon isn’t limited to the past 2 weeks. Whereas US yields have just barely broken through early 2021 highs, EU yields have smashed them.
But alas, the chart above is somewhat deceptive due to the overlaid axes . After all, the total range on the EU axis (left side) is only 1.6% whereas the US axis (right side) is 3.0%. Putting both of them on the same axis helps put things in perspective.
With this view, we can see just how much the Fed’s astonishingly aggressive response to covid impacted US bond markets in March 2020. EU’s guns were far from blazing by comparison and it shows with EU yields barely touching pre-covid lows. Perhaps the Fed’s big bazooka (hindsight might suggest “too big”) is the reason inflation lifted off sooner and reached higher levels? Granted, there was unprecedented stimulus on the fiscal side as well, and it’s hard to divvy up the blame/credit in perfect proportion. The other counterpoint would be that EU inflation was trending lower since 2018 whereas US inflation was arguably flat heading into the pandemic.
Speaking of CPI, we’ll get another monthly update for January this Thursday. Apart from that, the calendar is about as light as it gets. The only other notable inclusion is the Treasury auction cycle (3, 10, 30yr) on Tuesday through Thursday.