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According to investors, the simultaneous surge in bonds between the Euro and German governments suggests a “capital flight” to the eurozone benchmark debt as a shelter from the turmoil of the trade war.
German bonds and euros usually move in the opposite direction. Because optimism about the economy that boosts currency will undermine the demand for the Euroblock’s de facto safe asset, debt. This pattern took place last month after the country’s historic spending contract.
However, the euro increased by about 5% against the dollar this month. The two-year US borrowing costs exceeded Germany’s two points, from about 1.7% points in early March.
Mike Riddell, bond fund manager at Fidelity International, said the usual correlation between the euro and relative rates was “completely broken down over the past two weeks” and that it has benefited from concerns from the US policy-inducing market. This was “symptomatic of capital flight,” he added.
A simultaneous slump of the US Treasury and the dollar, usually moving in the opposite direction, the jungle nerves on Wall Street. However, in Europe, investors are similarly struck by German consumer prices and the euro surge.
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“The currency markets are no longer interested in interest rate dynamics,” said MFS investment management strategist Benoit Anne, adding that the large relative rise in U.S. market interest rates “traditionally cause a strong and bullish signal (for the dollar).”
“It appears that a shift in global asset allocation is taking place as global investors are looking at diversifying away from the US and seeing Europe and other regions as a more attractive place to invest,” he added.
Fixed income experts say global investors are revaluing the appeal of shelters as shelters’ assets amid concerns over US policymaking.
April Larusse, Head of Investment Investment Specialist, says investors are seeking “a government of our dependent government with safe, mandatory rules.”
She pointed to the increasing volatility of the Ministry of Finance in recent years. The Ice Bofa Move Index, a measure of bond investors’ expectations for future volatility at the Treasury, remains at a high level since the 2022 bond market sale. Last week, it touched on the highest in more than a year during the Treasury defeat.
However, there remains a major barrier to replace the Treasury as a global safe asset chosen by German surgeons, with the market just a small portion of the nearly $30 million US government bond market. The band’s historic rarity has seen them trade for a long time with yields below zero.
Even though commentators are said to be tested by a crisis of confidence in US policymaking, the Treasury’s position as a chosen global reserve asset is also tied to the dominant role of the dollar in global finance and trade.
Stephen Major, global head of HSBC’s bond research, said that he has missed the claims of a secular shift from the Treasury, saying that “the marginal buyers of the Treasury are increasingly domestic investors” to ease their holdings by some foreign investors.
However, fund managers say there are indications that large global investors are actually trying to diversify their safe asset holdings.
The short-term band tightened even further on Thursday as the European Central Bank bets on cutting interest rates and traders will cut further in the future. The euro had little changed.
“Some investors are looking at Europe in ways they’ve never seen before,” Insight’s Larusse said.
Additional Reports by Ray Douglas
