Government Bond Yields Fall as Investors Grapple With Muddied Economic Picture

Government bond yields in the U.S. and Europe are ending the week on a downward note with investors seeking safety after a volatile few days in stocks, bonds and cryptocurrencies.

The outlook for interest rates has been muddied by strong recent inflation data, which supports higher rates, coming up against negative surprises in economic activity, which augurs lower ones. That has cast uncertainty among investors ahead of interest-rate meetings for the Federal Reserve and European Central Bank in June.

Economic forecasters have been caught off guard by recent data releases, suggesting they have been too optimistic about the U.S. reopening proceeding smoothly. Citigroup’s U.S. economic surprise index, which measures whether such data beats or misses expectations, is on the verge of turning negative for the first time in almost a year.

U.S. 10-year Treasury yields slipped Friday and are lower on the week at 1.625%, down from 1.635% at the end of last week, according to Tradeweb. Yields on 10-year German government bonds touched minus 0.139% Friday, before rebounding slightly to minus 0.130%, which is down from last Friday’s close of minus 0.122%.

European yields had risen sharply earlier this month, with Germany now the only economy in the eurozone to have negative-yielding 10-year bonds.

Simona Gambarini,
markets economist at Capital Economics, thinks yields may have overshot. “Investors are now overestimating the extent and speed of monetary-policy tightening in the eurozone,” she  said.

On Friday, the German Purchasing Managers’ Index survey of manufacturing activity came in lower than expected, although it is still showing a recovery. European consumer-price inflation published Wednesday was 1.6% in April, which indicates a strong recovery in prices, but core inflation excluding volatile food and energy prices was below expectations at 0.7%.

Pricing pressures are building up due to global supply-chain problems as economies get back to work. Morgan Stanley analysts, however, don’t expect any reduction in ECB bond buying at its next meeting. Vaccinations are less than halfway toward the EU’s target, and the common European fiscal stimulus program still isn’t up and running.

In the U.S., inflation readings have been strong and the minutes of the last Fed meeting released Wednesday showed there had been some discussion about slowing bond purchases—also known as taper talk.

At the same time, housing starts disappointed on Tuesday, while the University of Michigan consumer-sentiment survey disappointed late last week.

Mark Carbana,
U.S. rates strategist at Bank of America, still expects U.S. rates to rise further especially if there is a strong reading for the Fed’s preferred measure of inflation, personal consumption expenditures, due out next Friday.

“Uncertainty around inflation is the highest it has been in decades,” he said, particularly around whether recent high readings are temporary or due to changes in the underlying economy.

He expects Treasury yields to rise in the second half of the year, pushed higher by rises in yields on inflation-protected Treasurys as the Fed starts to talk more seriously about tapering its bond purchases.

Write to Paul J. Davies at

Corrections & Amplifications
The University of Michigan consumer-sentiment survey disappointed late last week. An earlier version of this article incorrectly said the survey also disappointed at the start of the month. (Corrected on May 21)

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