MBS Live Day Ahead: Is Europe Back On US Bond Market Radar?

In 2010 and 2011, the early phases of the European financial crisis caused movement in US bond markets that puzzled a majority of domestic investors.  2012 (the apex of the monetary contagion concerns) and 2014 (the inception of the long road to ECB QE) took that theme to another level.  If we then conclude that it was Brexit that was primarily responsible for US yields being able to reach new all-time lows in June 2016, that means Europe has had an exceptionally heavy influence for years.

But things changed in 2017.  News and risks in the Eurozone quickly became boring after Brexit.  Markets largely moved on to trading the new and unexpected realities of the Trump administration--a theme that's arguably dominated most of the big picture bond market momentum since election night in late 2016.  Of course we couldn't forget the Fed, but Fed policy is unavoidably affected by fiscal policy.

Over the past few weeks, you may have noticed a few more instances of European markets getting credit for movement in US bond markets.  In the past few days, especially, a rally in European yields is helping US yields step back from the brink of disaster (well... more disaster anyway).  This can be seen in the top pane of the following chart.

The bottom pane of the chart shows us that US yields aren't shy about deviating from European yields.  Big rallies in Europe won't necessarily translate to US bond market gains.  Moreover, if either of these two lines looks like it's putting in long-term lows, it's the red one!  

I think the x-factor behind the increased importance of European bonds in recent days is simply the lull in US economic data and headlines, combined with the winter's prime holiday week.  Think about it: a 4 day week to begin with, and no major instances of economic data or scheduled events except, perhaps, for the FOMC Minutes which are nowhere near the reason to remain in the office that an FOMC announcement would be.  If my taskmaster of a boss gave me vacation time, I know I'd go skiing for a week for sure (even though I always run into my boss if there are mirrors around).

The point is that US bond markets are in a brief and less common period of increased suggestibility.  Europe happens to be making some suggestions, but it won't be our salvation in the bigger picture.  Sorry about that.