Trade tensions are benefiting US Treasuries, with the 10Y UST yield dipping below 4% intraday again as investors seek safety. Albeit not directly targeted by the tariff discussions, euro rates do get pushed around with US rates these days. One could say that most movements in euro rates recently have been US-driven, simply because the domestic drivers aren’t offering any novel insights. Yes, we have French headlines popping up now and again, but outside of French government bonds, the spillovers are negligible. Also, ZEW figures on Tuesday were weak again, but markets are already well aware that the (German) growth recovery is slow and fragile.
Even though euro rates have come down alongside the US, one could argue that the spillovers have been relatively mild so far. The 10Y swap rate is still trading broadly sideways between 2.6% and 2.7%, which has been the range ever since June. A common driver is global risk sentiment, which is being challenged by the revival of tariff threats. This also explains why the correlation of the front end of the euro curve with US rates is close to zero, while longer maturities are more sensitive.
A glide lower in US rates, as seen over the past months, would not alter our view that euro rates should remain around current levels or even drift higher. A sharp decline, however, would undoubtedly force Bunds and swaps to test lower levels too. The past few days have already seen the Bund outperforming swaps, reflecting demand for safe assets. With Bunds one of the last remaining AAA havens, we can expect these to see strong performance if risk sentiment were to deteriorate more sharply.
