The shrinking U.S. yield premium
Even as foreign governments like China have reduced their holdings of U.S. Treasuries recently, appetite has continued to push prices up and yields down, with the benchmark 10-year note yielding its lowest since 2017.
The big picture: One major theme boosting U.S. bond buying has been that Treasuries hold significantly higher yields than comparable government bonds from developed market peers like Canada, Japan and the eurozone. While the U.S. remains the best house in a bad neighborhood, that yield premium is compressing.
What's happening: The differential between U.S. and German yields reached its highest level in modern history in November, but has fallen precipitously since then, notes Bannockburn Global Forex chief market strategist Marc Chandler. Against other countries, yield differentials that were extraordinary have been whittled down from all-time or decade-long highs to cycle lows.
- U.S. 2-year yields were 85 basis points above Canadian yields in February, the most since the financial crisis, but have fallen to 45 basis points.
- The 2-year was more than 100 basis points higher than comparable Australian yields just 2 weeks ago and is now just 75 basis points higher.
Why it matters: Market strategists are betting the bond market has further room to run, with rates continuing to fall, but if the U.S. yield premium vanishes, foreign buyers could do so as well.
- That may also be bad news for the U.S. dollar, as lower bond yields make currencies less attractive to foreign buyers, but could be good news for U.S. multi-national firms who have been struggling with the dollar's prolonged strength.