the gap between u.s. and german government-bond yields increased to its widest in 27 years, another sign that investors are scrambling to bet u.s. growth will lift off under a new administration. the yield on the benchmark 10-year treasury note settled at 2.278% thursday, the highest since dec. 30, 2015. the u.s. yield premium to the 10-year german bund rose to 1.99 percentage points, the highest level since may 1989, said steven zeng, interest-rate strategist at deutsche bank . later that year, the berlin wall fell. <u+201c>it is a function of policies in the u.s. and europe going in different directions,<u+201d> said mark dowding, co-head of investment-grade debt at bluebay asset management, who has been buying german government bonds and selling u.s. ones. on thursday, u.s. housing starts rose at the fastest pace<u+00a0>since august 2007 and weekly jobless claims fell to the lowest level since 1973. the moves reflect expectations that u.s. deficit spending, lower taxes and lighter regulation under president-elect donald trump will boost growth and inflation, forcing the federal reserve to step up its pace of interest-rate increases. by contrast, markets continue to expect slow growth, low inflation and loose policy in europe and japan. the widening yield spread also signals investors<u+2019> unease over political risks in europe that may undercut its growth prospects, investors and analysts said. rising yield premiums in the u.s. have been rippling into other markets. most notable is a surging u.s. dollar as higher interest rates in the u.s. make the currency more attractive. the euro fell to the lowest against the dollar since december during thursday<u+2019>s session. in late afternoon, the euro was down 0.6% at $1.0627. the dollar rose about 1% to <u+00a5>110.133, the highest against the yen since may 31. fed chairwoman janet yellen on thursday said a rate increase in december remains on the table, while stressing that fed tightening will continue to be gradual. brian daingerfield, macro strategist at rbs securities, said when the euro sank to a 12-year low of $1.0457 in march 2015, a dollar rally started to taper off as fed officials began to express concerns over the currency<u+2019>s rally. <u+201c>the fed will become less comfortable<u+201d> if the dollar<u+2019>s strength reduces inflation expectations and tightens financial conditions, he said. europe still is grappling with fallout from the u.k.<u+2019>s referendum in june to leave the european union. jack mcintyre, portfolio manager at brandywine global investment management, said the referendum in italy on constitutional overhaul in early december and elections in france early next year may further muddy the growth outlook in the region. some economists and analysts expect the european central bank to expand its bond- buying program at the december policy meeting. in thursday<u+2019>s release of the minutes for the ecb<u+2019>s october meeting, policy makers signaled they were ready to boost stimulus again if needed as they expressed concerns about weak inflation. the yield spread between the u.s. and japan hit the highest level since january 2014. the yield premium investors demanded to hold u.s. 10-year notes relative to the 10-year japanese bond climbed to 2.26 percentage points thursday, compared with 1.92 percentage points on election day in the u.s. some investors see the u.s. selloff as the latest overreaction in a market that routinely has swung to extremes in recent years. the treasury/bund spread last hit a fresh high in march 2015, when ecb plans to purchase bunds sent german yields near zero before a subsequent selloff pushed yields higher again. one piece of data released thursday highlights the concerns of some investors that bets on inflation have grown crowded in recent days. core cpi, the u.s. consumer-price index excluding food and energy, gained 0.1% last month, slower than a 0.2% rise forecast by economists. investors have been selling treasurys and piling into treasury inflation-protected securities to seek shelter against a rise in consumer prices. a $11 billion sale of 10-year tips on thursday attracted 72.5% indirect bidding, a proxy of demand from foreign investors, the third highest on record. john stopford, money manager at investec asset management, said he expects the u.s. 10-year yield to rise to between 2.5% and 2.75% before peaking out. <u+201c>the divergence theme has further room to run in the short term,<u+2019><u+2019> mr. stopford said. he said the u.s. yield premium to german bunds may shrink if mr. trump<u+2019>s policy fails to meet investor expectations or if the policy fails to boost growth as expected. but for now, signs that u.s. growth remains on track is supporting a rise in shorter-term debt yields, which are the most sensitive to shifts in fed policy. the yield on the u.s. two-year treasury note settled at 1.025% late thursday, the highest close since jan 5, compared with 1.005% wednesday. the yield has climbed from 0.86% on election day. write to min zeng at min.zeng@wsj.com
u.s. government bond yield premium highest since berlin wall fell - wsj
min zeng