This year we’ve been talking about two things: The easing of the crisis in Europe and the persistently low yields on US Treasuries.
In fact we’ve talked about both just today, as Goldman is out with a call urging clients to short US Treasuries on the basis that the low rates do not reflect the improving macro conditions.
We also pointed out earlier how once again, the markets were improving in Europe in exactly the manner that you’d hope: Yields on peripheral bonds are falling, and European banks, the epicentre of the crisis, are enjoying another nice rally.
Not surprisingly, you can draw a pretty straight line between both of these stories.
On Bloomberg.com, we did a 1-year chart comparing 4 things: 10-year Treasury yields (dark orange), European banks (Green), the S&P 500 (light orange), and the STOXX Europe 600 (red).
As you can see, European banks and Treasuries are are almost identical lines, while the S&P 500 and overall European stocks have left performed much better.
And it makes sense. European banks are what you dump when you’re feeling extremely nervous. US Treasuries are what you buy when you’re feeling extremely nervous. Thus if you’re wondering why yields are so low on US Treasuries, even in light of the overall macro data and stock market action, then wonder no more. As long as people are still nervous about the European banking system — something that’s obviously abating, given the rising green line — then people will cling to Treasuries with their dear life.
KEY: DARK ORANGE = 10-year Treasury rates. GREEN = European Bank Stocks Index. LIGHT ORANGE = S&P 500. RED = STOXX Europe 600.