US-Ger – The 10-30y Box Spread

The US & Germany 10-30y spreads have been heading in opposing directions for the past week or so. The result has left the US 10-30y spread steeper than in Germany, by around 4bp using the benchmarks.

10y Treasury is flirting with lowest ever yield level and so the market is not short of extreme levels & spreads. Why are we highlighting the 10-30y box? Mainly because of what it’s saying about monetary policy within the chaos but, also to introduce what might happen fiscally.

The American curve has steepened upon the legitimate hope that the Fed cuts rates and there is also the new 20y UST to contend with. The long end of Europe flattening because the ECB is close to the reversal rate, so requiring additional QE to drive monetary policy.

The scissor effect on the curve box emphasises the differing way the two central banks might react with monetary policy.

The virus has scope to shift aggregate supply and aggregate supply curves. Yet, if the virus causes a significantly larger supply than demand shock (and there is much debate here), then monetary policy of any form probably does not have enough firepower to create growth by itself. Fiscal policy would need to be employed and if this is the case, it may be fiscal policy and supply that ends up determining where this box spread might end up.

UST-Bund 10-30 Box spread

                                            Source Bloomberg