![](\"http:\/\/ch.jfdi.cc\/wp-content\/uploads\/2024\/02\/eurozone-bonds-dance-to-the-beat-of-us-markets.jpg\")
Eurozone bonds are trading more in sync with their US peers than ever before, as investors ignore the slowdown in Europe and remain laser-focused on inflation and interest rates, driving correlations between the two markets to a record high in recent weeks.<\/p>\n
Although the enormous US bond market typically exerts a big influence, the tight correlations have puzzled some bond analysts, given the weakness of the eurozone economy.American bank State Street found the 52-week correlation between moves in German and US two-year bond yields has risen to a record high. Correlations between longer bonds are also highly elevated.\u201cThe US has always driven everything, but not to this magnitude,\u201d said Jon Jonsson, senior fixed income portfolio manager at Neuberger Berman. \u201cThe correlations have gone up quite dramatically, this is really stunning.\u201dHe added: \u201cAs an investor, it\u2019s difficult. You try to make country specific-bets, but you\u2019re not getting any benefit.\u201dThe US economy has powered ahead of Europe\u2019s, where governments spent less during the pandemic and industries have been hit hard by the energy crisis.Eurozone gross domestic product grew just 0.5 per cent in 2023, while US GDP rose 2.5 per cent. Survey-based data shows the US private sector is growing, while the euro zone\u2019s is contracting.But bond investors and strategists say inflation has become almost the sole focus of markets. They also note that the European Central Bank typically follows the Federal Reserve, and the US bond market is a behemoth that dictates conditions around the world.INFLATION OBSESSION<\/strong>Inflation began to surge in the eurozone and the United States in 2021, prompting the Fed to hike rates in March 2022 and the ECB to follow in July. Price growth peaked at 9.1 per cent in the US in June 2022, four months before it topped out at 10.6 per cent in the eurozone, before falling to around 3 per cent in both.The lag in inflation and interest rates in the eurozone has left investors looking to the US economy for hints about what might be coming.\u201cA common factor has been driving inflation in the US and the eurozone\u2026the onset of COVID and the resolution of the adverse supply shock,\u201d said Stephen Jen, CEO of investment firm Eurizon SLJ Capital. \u201cBond yields, therefore, are tracking each other primarily reflecting the high correlation of inflation.\u201dECB Governing Council member Robert Holzmann told Bloomberg on Friday: \u201cTypically, the Fed in the last few years has always gone first by about half a year, so I would assume\u2026we would also follow with delay,\u201d noting that the \u201ccurrency areas are interrelated\u201d.KING DOLLAR<\/strong>US bond yields have long been the benchmark for borrowing costs everywhere. But that position has grown as US administrations have issued debt at a faster pace than Europe to tackle the financial crisis and COVID-19 slump.There is $21.9 trillion of US government securities outstanding, excluding that held by the central bank, according to Barclays estimates. That compares to $7.5 trillion for the eurozone and $1.2 trillion for Germany, its biggest economy.As sovereign bonds are imperfect substitutes for each other and that money can flow around the world easily, when the US moves, everything else tends to move in the same direction.Yet many investors think record correlations are unlikely to last.\u201cWe expect this correlation to fall back as we begin to see more of a divergence in macro and policy outcomes,\u201d said Julian Le Beron, chief investment officer for core fixed income at Allianz Global Investors.Michael Metcalfe, head of macro strategy at State Street, said the correlation in bonds was likely subduing volatility in currency markets, which are driven by cash flowing towards countries with higher relative bond yields. A divergence in bond markets could therefore ignite volatility in FX, which has hit multi-year lows this month, he said.Barclays economists think the ECB is in fact likely to cut interest rates in April ahead of the Fed in June, given the weaker euro zone economy.\u201cSay the ECB makes significant revisions to their forecasts, and takes a dovish turn, then it again bodes well for (German) Bunds to outperform Treasuries,\u201d said Barclays\u2019 head of euro rates strategy Rohan Khanna.Follow the Eurozone bonds are trading in sync with US bonds, with correlations between the markets reaching a record high. The 52-week correlation between German and US two-year bond yields has hit a record, with longer bonds also showing high correlations. The US economy has grown more than Europe’s, with US GDP rising 2.5% and Eurozone GDP growing 0.5% in 2023. Inflation, which surged in both regions in 2021, has become a key focus for markets. The Federal Reserve raised rates in March 2022, followed by the European Central Bank in July. Inflation peaked at 9.1% in the US in June 2022 and at 10.6% in the eurozone before falling to around 3% in both regions. The US bond market, with .9 trillion of government securities outstanding, influences global borrowing costs. Investors expect the correlation between Eurozone and US bonds to decrease as macro and policy outcomes diverge. The European Central Bank is anticipated to cut interest rates in April, ahead of the Federal Reserve in June.<\/p>\n","protected":false},"author":3,"featured_media":3290,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"Default","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[186,357,432,3,898,50,26,358,10,599,201,51,52,696,576,250,415,67,899,187,34,544,380,602,18],"class_list":["post-3289","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cyprus","tag-business","tag-businesstop","tag-covid","tag-cyprus","tag-debt","tag-ecb","tag-economy","tag-energy","tag-energy-crisis","tag-euro","tag-europe","tag-european-central-bank","tag-federal-reserve","tag-gdp","tag-germany","tag-google","tag-government","tag-inflation","tag-interest","tag-international","tag-markets","tag-united-states","tag-us","tag-us-gdp","tag-world"],"acf":{"keyphrase":"","keywords":"","sourceimg":"","country-category":""},"yoast_head":"\n
\nCyprus Mail on Google News<\/p>\n","protected":false},"excerpt":{"rendered":"