Gavekal Capital: Could the Bond-Bund Spread Widen Even Further?

Tuesday, May 12, 2015

Could the Bond-Bund Spread Widen Even Further?

We first discussed the historic extreme in the spread between German Bunds and U.S. Treasuries last April (here).  And that relationship has continued since, propelling the difference (in red, below) to levels well above those reached over the last two decades:

(Germany in blue, U.S. in grey)

With the recent action in yields, is it reasonable to predict that this spread will contract back to more normal levels?  That remains to be seen, of course.  What we can say for sure is that, while we have heard a bit of buzz about a convergence in yields, no one has mentioned the potential for an even wider disparity (similar to that of the mid-80s):

If the U.S. stays on the path of "normalization" while Greece continues to provoke bouts of panic in Europe, such a scenario might not be too far-fetched.