Eurozone Yields: Sustainable?

Around the Curve

Eurozone Yields: Sustainable?

Is the current level of 10-year Eurozone yields the new normal?

The breakout in eurozone 10-year yields is noteworthy. Although political risks within Europe are driving Italian yields higher and German yields lower, the gross domestic product (GDP)-weighted 10-year eurozone yield seems to be notching higher. The upward pressure on these regional yields could be a result of what’s happening in the U.S. Treasury market, or a credible sign that European bonds are starting to price in the output gap relative to labor market conditions.


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While growth momentum has weakened in Europe in 2018, the output gap continues to diminish as the overall unemployment rate continues to decline. Core inflation is still subdued near 1.0%, but if history remains a guide, then the tightening of the labor market will lead to a further acceleration in wages, which, in turn, will drive core inflation towards the European Central Bank (ECB) target of 1.5% - 2.0%. If this is the case, then this recent breakout in yields may be more of a long-term trend rather than an anomaly.


All data Source: Bloomberg, at their respective dates.


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