Declining German Bond Yields Have Essentially Placed a Cap on U.S. Interest Rates
Differing growth trends between the U.S. and the rest of the developed world continue to drive divergent policy responses among the world’s major central banks, which are affecting asset prices, especially for sovereign debt.
The Federal Reserve has indicated that it is watching and waiting for further improvement in U.S. employment and a recovery in the inflation outlook. Thus, the expectation for an increase in short-term interest rates has shifted to later in the year.
Dollar strength reflects stronger economic fundamentals in the U.S. relative to the rest of the world. This is partly a function of the U.S. economy being further along in the recovery process following the 2007–2009 financial crisis.
Demand for relatively higher yielding U.S. Treasury bonds has soared, effectively suppressing U.S. interest rates, as the yield differential between Treasuries and German government bonds has climbed to record highs. Even in the range of 2%, Treasuries appear far more attractive to investors than German or Japanese bonds yielding less than 1%.
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