Insignia Consultants | Shrinking US risk premium to divert more cash into Europe
Shrinking US risk premium to divert more cash into Europe
March 31 (Reuters) - The premium investors enjoy from holding U.S. government debt over that of Germany is set for its biggest quarterly drop in years, with tectonic fiscal policy shifts on both sides of the Atlantic expected to shrink this gap further, luring more cash to Europe.
The spread between U.S. and German 10-year bond yields reflects the difference in how much it costs each government to borrow over the long term.
It has fallen by 62 basis points (bps) since the start of the year to 158 bps, and is set for its biggest quarterly fall since the global financial crisis in 2008, excluding moves during the pandemic.
The gap reflects the divergence in interest rates and economic outlooks and is crucial for both investment flows and the euro/dollar exchange rate, which in turn affects trade balances, inflation levels, and corporate profits.
Germany in March approved plans for a massive spending splurge, jettisoning decades of fiscal conservatism, which sent bond yields soaring.
