The so-called transatlantic spread, which gauges the difference between the yields of US Treasuries and German Bunds, has been volatile in recent weeks. The 10 year spread, now around 180bp, at one point approached 200bp during April's US tariff saga — similar to where it started the year. The spread had fell to as low as 150bp after Germany’s ‘whatever it takes’ moment in March, when it committed to boost defence and infrastructure spending.
The large swings in the spread have resulted in a fall in the correlation between the two markets to 20%-30% from almost 90% at some points last year, according to UniCredit.
The Bund-Treasury correlation is dictated by many variables and assigning causation is far from straightforward, as the report pointed out. But it was clear that this divergence is taking place as the interest rate paths of the US and the eurozone reach a fork.
The aggressive trade policy of the US, for instance, argues for different inflation forecasts for either side of the Atlantic, which will result in different interest rate decisions by the respective central banks.
Growth prospects have become hazier not only as a result of US tariff policy, but also Europe’s defence spending ambitions and how they will be funded.
The new divergence may be here to stay. As the US has clearly signalled with its policy intentions at least, the once strong macroeconomic interdependence of developed economies — and the bonds issued by their governments — may be breaking.
But on the flip side, having two major government bond markets less highly correlated could be helpful to investors from a risk diversification point of view.
With US policy and the European response so uncertain, the divergence in their government bond markets and the risks and opportunities that will bring is something to grab hold of.