Global Yields Weigh In

December 22, 2021

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Our focus has been on US Treasury yields in recent months – and for good reason.

The 30-year yield recently undercut its summer lows, and the 10-year yield briefly lost the critical 1.40 level. Both have since recovered. But these crucial rates remain stuck in the same messy ranges that have defined most of 2021.

Given the lack of decisive action in domestic yields, we think it's a good time to check in on the overseas bond markets in hopes of gleaning some insight into the potential direction of yields outside the US.

In today’s post, we’re going to switch things up and take a look at the 10-year yields from other major developed countries.

Let’s start with the European financial behemoth, Germany:Like much of the developed world, Germany’s 10-year yield has been in the process of carving out a bottom for the past two years.

Though the current rate may be negative, the critical takeaway is that it's stopped going down well above its July lows. It’s promising to see a series of higher highs and higher lows this year, but we really want to see this base resolve higher before we have any conviction.

Even though it didn’t surpass its Q1 peak by much, it’s constructive that it hit fresh year-to-date highs this fall. That’s more than we can say for the US 10-year, as its recent highs fell short of its peak from March.

These points might not be overly bullish, but they are a few of the common themes - that are present to varying degrees - as we review other developed countries’ government yields.

Key similarities can be seen in Spain:Like Germany, Spain’s 10-year yield is forming a big base with a series of higher lows. It has rebounded strongly the past few weeks, as it’s up 17 basis points from the recent lows. It also managed to retest and slightly surpass its spring highs in early November.

While a series of higher highs and higher lows doesn’t confirm or decisively suggest the next move for global rates, this kind of price action is definitely not bearish. Like most things these days, though, when we zoom out it’s really just a sideways mess.

On the flip side, it’s not a negative data point to see rates in one of the more financially unstable areas of Europe rise along with the rest of the continent.

Next we have the United Kingdom:Similar to other European rates the UK 10-year yield is up almost 20 basis points from its low earlier this month. It also managed to reach its year-to-date highs this past fall - well above its former highs in mid-May.

A similar pattern of higher highs and higher lows can be seen across Europe and even Canada, but not when we turn to the US.

Our final chart displays this key difference. Here we're overlaying the US 10-year and the Canadian 10-year:Unlike all of the other developed countries presented in this post, the US 10-year yield peaked in April and has failed to make a higher high in recent months. Beyond that, the Canadian and US yields look almost identical, as both are range-bound messes.

The bottom line is all of these yields are still chopping sideways within their respective year-to-date ranges.

Regardless of the asset class, most markets remain trendless. Even critical intermarket ratios like consumer discretionary versus staples and copper relative to gold fail to offer any definitive information - besides markets being messy for longer.

The same is true for government yields along the middle of the curve. Recent action doesn’t give us much indication of where we’re headed as the path of least resistance is neither up nor down.

But the series of higher highs and higher lows seen across European 10-year yields is constructive, especially as rates have begun to curl back up in recent weeks.

If this trend takes hold and we see benchmark rates hit new 52-week highs in Germany, Spain, and the UK, we have to seriously ask ourselves at what point does the US follow?

If and when these global yields start to resolve higher it will be valuable information and we’re likely to see the US 10-year resolve higher as well. But, for now, it’s simply more of the same when we look across the pond. Developed market yields remain stuck in the same ranges they’ve been in since last year.

We’ll continue to monitor international rates for potential insight and report back as soon as this changes.

Stay tuned!

Countdown to FOMC

Following the Federal Open Market Committee meeting last week, the market is now pricing in the first rate hike in May 2022.

Here are some of the probabilities for the May meeting based on fed funds futures: