Rate Divergence Creating Opportunity in Bond Market

Mario Draghi and Janet Yellen are creating an opportunity in the bond market that investors haven’t seen for a quarter century.

Draghi may make it even more attractive on Thursday. That’s when the European Central Bank meets and may give more details about the ECB president’s plan to fight deflation by buying government debt in the euro region. The purchases will start this month, Draghi said in January.

Federal Reserve Chair Yellen meanwhile is considering raising interest rates. The result is that U.S. 10-year notes yield about 2.11 percent, versus 0.37 percent for German. The last time the difference was this much was May 1989. The divergence is “a key issue” for the bond market, Mohamed El-Erian says.

“Europe is going to be anchored pretty strongly by the QE, plus a sluggish economy, plus low-flation or deflation,” El-Erian, chief economic adviser at Allianz SE and Bloomberg View columnist, said on Wednesday in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “The U.S. much less so. So that relationship is absolutely key.”

Nations from Canada and Russia to China and Singapore are seeking to support their economies and keep prices from falling through monetary policies.

Benchmark 10-year Treasury yields fell one basis point to 2.11 percent as of 8:19 p.m. in New York, according to Bloomberg Bond Trader data.

via Bloomberg

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza