Interest rates overtook currencies as the hot topic on the trading desk and with our clients this week.
As our head trader, Alan Rose, mentioned in one of his email Morning Commentaries, the U.S. 2-year Treasury yield hit 1.47 percent this week – a level not seen since 2008 when the global financial crisis began in earnest.
What fascinates us is this question: Have we finally put the global financial crisis of 2008 so far behind us that today is truly a different era? I believe you can make that argument for the United States. And when it comes to world equity markets and economic growth, we - and our investment colleagues at City National Rochdale - have made the point that the world's economy seems to be on a solid upward path.
That said, European bond yields tell a different story. As we start marking 10 years since the global credit crisis, European 2-year bond yields are still at crisis levels. Almost all European countries have yields below zero, in line with the European Central Bank's negative overnight deposit rate.
Does that tell us anything? Possibly. Certainly most of this negative yield is the result of continued easy monetary policy from the ECB – which is quite appropriate when considering the fragile nature of the European economy over the past few years. Remember that the ECB is essentially following the U.S. Federal Reserve, but is a few years behind in its rate cycle.
Part of the U.S. story comes as well from market hopes that tax reform is at least back on the table. Markets had pretty much priced out all hope of tax reform this year after a string of legislative failures in Washington, so even the few details of the plan released this week were latched onto by the markets.
The long end of the rate curve – the 10-year bond – is where markets hold a lot more sway over the central banks. That story is one of lowering of yields around the world with little expectation for those to rebound anytime soon.
We look at these developments and remember that while Europe has rightfully boasted of good news and improvements this year, there are still significant issues from the last decade or two that are being worked through.
Our View: Problems that take years to build take years to resolve. So perhaps it's no surprise that Europe is still wrestling with significant issues.
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