Eurozone Yields: Sustainable?

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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.

 

Source: Bloomberg. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

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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