Great Graphic: Fed May Taper, but UK and German Bond Yields are Rising Faster

Speculation that the Fed will being slowing its purchases of long-term assets as early as next month is arguably the most significant market force. One would intuitively expect that, given the forward guidance of both the BOE and ECB that US interest rates would be rising relatively quicker. This is not the case.

This Great Graphic, composed on Bloomberg, shows10-year yields in the US (white line), the UK (green) and Germany (yellow). 

Over the past week, the US 10-year yield has risen almost 12 bp, but the German yield has risen 13 bp and the UK 16.  Over the past month, the point is really driven home.  The US 10-year has risen 13 bp.  The German 10-year yield has increased twice as much and the UK even more at almost 32 bp. 

Indeed, it looks like the UK 10-year yield can rise above that offered by the US Treasury, which has been the case since early 2007, with some brief, though mostly short-lived exceptions until May.  Note that UK headline CPI is running just below 3%, while US headline CPI is likely running near 2% (the July report will be released tomorrow). 

The fact that peripheral European bond yields (not only Spain and Italy, but Portugal and Greece as well) have fallen (reducing the premium paid over Germany) is a constructive development and helps deter (or defer) risks that Fed tapering could renewed strains in the euro area.    That said, we remain concerned that in early Q4, after the German elections and as countries finalize 2014 budget, domestic political strains will increase.