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JUMP IN EUROPEAN BOND YIELDS COULD HIT DEMAND FOR US CORP CREDIT

A dramatic jump in European bond yields since German political parties agreed to a historical debt overhaul may crimp some demand for some U.S. debt, as European yields are now more attractive for foreign investors after hedging costs, according to Bank of America.

The parties hoping to form Germany's next government on Tuesday agreed to create a 500 billion euro infrastructure fund and overhaul borrowing rules in a tectonic spending shift to revamp the military and revive growth in Europe's largest economy

Yields on benchmark 10-year German government bonds reached 2.93% on Thursday, the highest since October 2023, and up from a high of 2.50% on Tuesday. DE10YT=RR

“Higher yields in Europe should translate into weaker foreign demand for US IG, as European yields are now more attractive after hedging costs,” BofA analysts Yuri Seliger and Jean-Tiago Hamm said in a report.

Spreads on the European investment grade index also tightened by around 7 basis points and the index is now trading tighter than U.S. investment grade by some of the largest margins since 2021, they said.

The rally in Europe should mean there is more room for compression for European yankees, bonds issued by European companies in the U.S., which still trade cheap when compared to U.S. issuer spreads.

The increase in defense spending, meanwhile, should support defensive credits, which are trading at some of the cheapest levels relative to the index since 2010, Bank of America said.

(Karen Brettell)

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