December 3, 2015 Comments Off on Pascale’s Perspective: The Great Divergence Is Upon Us Views: 402 Connect Classroom

Pascale’s Perspective: The Great Divergence Is Upon Us

By: David R. Pascale, Jr.- George Smith Partners

Now that the December Fed rate hike is a foregone conclusion and ‘priced into’ bond yields, markets are now focusing on the timing of the next rate hike, and the pace of future hikes. That’s why yesterday’s weaker than expected ISM Manufacturing report saw the 10 year Treasury yield drop about 10 bps to 2.17%.

Fed Chair Yellen has issued dovish comments on the speed of future hikes. The rest of this week should be interesting: the ECB is expected to announce major stimulus tomorrow, increasing their bond buying and possibly lowering their deposit rate (the rate it pays commercial banks) again to below negative 0.2%. The intention is to stimulate inflation. This will depress already low European bond yields (the German bond is at 0.48%).

The ‘divergence’ of US and European central banks is unprecedented, uncharted territory. The immediate effect will be on US Treasuries, the longer bond yields (10 year) will be pulled lower by the ultra-low European yields, while short term bonds yields (2 year for example) are spiking, creating a flattening yield curve. Also note that the 10 year closed at 2.17% today, the same yield as the end of 2014. …stay tuned…

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