Market News

(Bloomberg) -- A rally in Treasuries this month has driven down yields closer to German debt, as traders bet on bigger US interest-rate cuts and more borrowing in Europe.

The gap between both countries’ 10-year yields closed at 184 basis points on Tuesday, the narrowest since October. It’s set for the biggest monthly decline since May.

The move highlights the shifting tone in both markets since the start of the year, when US Treasuries were expected to struggle given sticky inflation and the new administration’s focus on fueling growth. Instead 10-year Treasury yields have plunged 30 basis points in just two weeks to the lowest level this year, on mounting concerns over the economy.

The recent string of data points has now “put the focus in the US back on growth,” said Natixis rates strategist Benoit Gerard. On Tuesday figures showed US consumer confidence dropping this month by the most since 2021, adding to evidence that uncertainty over the government’s plans is weighing on households.

US Treasury Secretary Scott Bessent fueled bullish wagers by saying that the 10-year yield should “naturally” drop as President Donald Trump’s policies are implemented. It halted the recent move on Wednesday, edging up two basis point to 4.31%.

Meanwhile, the equivalent German yield is little changed this month, trading around 2.45% on Wednesday, as investors factor in the prospect of a new government borrowing more following Sunday’s elections. That would partly be a response to US President Donald Trump’s determination that Europe pours more cash into reinforcing its military.

In order for German debt to become attractive to investors, yields would need to “rise further,” particularly given the outlook for more debt supply, according to analysts at Amundi Investment Institute. Natixis’s Gerard is also “waiting for a convincing trigger to price significantly higher bund supply.”

The spread between the countries’ two-year yields has also narrowed as traders price in more rate cuts from the Federal Reserve this year following the recent parade of softening US economic data. Swaps imply more than two quarter-point moves by December, compared to just one two weeks ago.

(Updates with Natixis and Amundi comments.)