Recent financial reports indicate that big investors buy European bonds, speculating about forthcoming cooler inflation. Meanwhile, they have sold US Treasuries, hoping the European central bank will start cutting interests sooner than the Fed.
T Rowe Price, JPMorgan, and Pimco recently raised their European government bonds. This move hiked the gap between the benchmark 10-year US & German borrowing costs. In any case, the gap rose to 2% points to attain its highest level since November.
JPMorgan’s global head of fixed income & chief investment officer, Bob Michele, explained that Europe expects rate cuts sooner than the US. Bob said it is hard for the Federal Reserve to give an economic indicator to cut rates. In addition, he noted that JPMorgan Asset Management holds unusually large European government bonds.
Pimco global fixed income chief investment officer Andrew Balls says he favors UK gilts and European government bonds over US treasuries in 2024. Overall, he explained that the UK and European economies showcase more stamina on ‘inflation correcting.’ The company lowered its forecast to a two-quarter-point rate this year.
The update comes amid diverging European and US economies with weaker economies and softer inflation. But what are the leading causes of these trades?
Cooler Inflation
Analysts predicted a 3.4% increase in March US inflation data. Nonetheless, previous readings for February and January were higher than analysts’ expectations. On the other hand, the Eurozone inflation rate dropped to 2.4% in March, fueling expectations for interest rate cuts since it was lower than the forecast.
Europe showcases a more open economy than the US, with less fiscal impulse and more sensitivity to global manufacturing. Some analysts predict that the US will incur a deficit. Here are the likely impacts as big investors buy European bonds.
Bond Yields
Bond yield impacts are more significant in the United States since the benchmark Treasury yield rose to 4.4% from 3.9%. On the other hand, the equivalent German Bund rose to 2.4% from 2.1%. The US total revenue and expenditure difference will be 8.1% of the GDP in 2024. Yet, Germany will record a 1.4% difference in revenue & expenditure.
It is evident that big investors buy European bonds and are reluctant to invest in US Treasuries. Yet, the risks involved with raising interest rate cuts earlier than the Fed can be impactful. Thus, the European Central Bank is keen to make the right decision.
