Since April, the German yield curve is steeper than its US counterpart (considering the spread between the 10y. and the 2y. yields). This has not been so often the case since the creation of the Eurozone. The US yield curve is flattening as the Fed continues its fed funds tightening cycle: the flattening will continue, mostly on the 5 to 30 y. segment. On the contrary, the German yield curve is likely to continue to steepen as the ECB’s QE tapering will exert an upward pressure on long-term yields while short-term yields will remained anchored for some time at very low/negative levels because the ECB will keep unchanged its key rates for a long period. Taking another angle, this means that the 2y. yield spread between the US and Germany will widen while the 10y. yield spread will either stagnate or tighten.
Historical empirical evidence shows that credit spreads tend to peak at the end of recessionary periods. Then, credit recovers with rising government bond yields: recovery means improving credit metrics through an increasing cash flow generation. Did it work also in the present cycle?
Valentine AINOUZ, Sergio BERTONCINI, Bastien DRUT
Fixed Income and FX Strategy