US Bond Yields Made In Germany

Another round of central bank easing is underway. So why are bond yields rising?

The rose from a recent low of 1.47% on 9/4 to 1.72% on Tuesday. The record low was 1.37%, hit on 7/8/16 just after the Brits voted to leave the European Union (EU). The risks of a no-deal Brexit have eased in recent days, but it still could happen next month. A hard Brexit could cause the bond yield to retest its recent low.

In any event, the main reason that the US bond yields has moved higher in Germany than the UK. The has risen from a recent record low of -0.71% on 8/30 to -0.54% Tuesday. Reuter's reported: "Germany's shortfall in positive territory for the European Central Bank could deliver this week."

During a parliamentary budget on Tuesday, Germany's Finance Minister Olaf Scholz said that Germany can counter a possible recession with a big stimulus package. On Monday, Reuters reported that Germany has been setting up a "shadow budget" to boost domestic and international debt, sparking a bond sell-off.

European Central Bank (ECB) President Mario Draghi has been lobbying for ECB's ultra-easy monetary policies. Germany has resisted doing so and even questioned the ECB's asset purchase program. Germany's fiscal and monetary conservatives might be starting to waver as a result of Germany's intensifying manufacturing recession, with factory orders and production down 5.6% and 4.8% y / y through July.

Last year, when there was widespread bearishness in the bond market, with some predicting that US yield would rise to 3% to 4% -5%, I observed that the US bond yield could be "tethered" to the comparable German and Japanese yields, which were barely above zero. This year, both have dropped solidly below zero.

During the press release, Draghi pleaded for more tax stimulus, especially from Germany:

"What's hitting the manufacturing sector in Germany and [elsewhere in Europe is] an idiosyncratic shock. Here is very important. [T]he mildly expansionary fiscal policy is supportive in the euro area. But if there is a significant worsening in the Eurozone economy, it is unquestionable that fiscal policy … becomes the essence. … I start making this point way back in 2014 in a Jackson Hole speech: monetary policy has done a lot to support the euro area … but if we continue with this deteriorating outlook, fiscal policy will become of the essence.