Asymmetry between US and European bond yields

The 10-year Treasury yield fell from 3.59% to 3.49% as investors were digesting a disappointing retail sales report that added to concerns the Fed’s rate hiking campaign could lead to a severe recession. Similarly, the 2-year yield lost 14 basis points from 4.34% to 4.20%. The Fed Fund futures closed at 95.16 (May 2023). The terminal rate is now priced at 4.84% for next spring.

In contrast, the yield on the German 10-year Bund jumped from 1.93% to 2.15%. The French 10-year OAT yield moved in tandem with the German bond, adding 30 basis points from 2.39% to 2.69% while the UK 10-year Gilt rose 15 basis points from 3.18% to 3.33%. 

This asymmetry between US and European Treasury yields reverberated throughout investment grade corporate bonds. The IBOXX € Liquid Corporates index was down 1.31% over the week (down 12.46% YTD) while the IBOXX Ishares $ Investment Grade Corporate Bond Index edged up 0.23% (down 15.23% YTD).

High-yield bonds lost 0.37% in Europe (IBOXX € Liquid High Yield Index down 9.16% YTD) and 0.17% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index down 7.57% YTD).

Emerging debt in local currencies gained 0.13% (down 15.33% year-to-date) while the dollar index remained virtually unchanged over the week.