Yield Gap

The Great Global Bond Race

  • Why it matters

    Why it matters

    The bond bull market is coming to an end after 35 years, and investors are having to rethink their portfolios.

  • Facts


    • The yield on the 10-year U.S. Treasury bond has risen from a historic low of 1.3 percent to 2.5 percent and is expected to increase to as much as 6 percent in the next four to five years.
    • The yield on the 10-year German government bond was minus 0.2 percent last summer. Now it has reached 0.4 percent.
    • The Transatlantic yield gap is growing larger. The last time the gap was over two percentage points was more than 27 years ago.
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Tensions between German and U.S. bond markets are currently running high. Source: DPA

For over 35 years, bond fund managers who bet on price advances in U.S. government bonds earned a lot of money. However, the bull market for bonds with rising rates and falling yields has finally come to a close.

“If you look at the yields on 10-year U.S. bonds, which now are at 2.5 percent and more than a full percentage point higher than in the summer,  I think we’ve seen all the lows in yields for the next two years,” says Michael Krautzberger, BlackRock’s head of European fixed income.

Xueming Song, fund manager for Deutsche Asset Management, even thinks yields could be on the rise for the next 20 years. And not only in the United States but also in Germany. Only last summer, the yield on the 10-year German government bond was minus 0.2 percent. Now it has reached 0.4 percent. However, the increase hasn’t been as high as in the U.S. and the transatlantic gap is continuing to grow. The last time the gap was over two percentage points was just over 27 years ago when the markets were not as globally intertwined as they are today.

Many experts expect the difference to become even larger. “Transatlantic tensions will intensify on the bond markets,” says Alexander Aldinger, rate strategist at Bayerische Landesbank. And there are many reasons why. The U.S. economy is currently performing better than the euro zone’s, and incoming U.S. president Donald Trump has announced massive infrastructure investments with simultaneous tax reductions.

“This could give the U.S. a unique boost in growth and inflation,” explains Pioneer Investments’ head of global asset allocation research Monica Defend. And according to Tilmann Galler, chief investment strategist for JP Morgan Asset Management, growth and inflation are the arch enemies of bond investors.

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