(Bloomberg) -- U.S. two-year Treasuries haven’t yielded this much over their German counterparts for decades, yet it’s providing little help for the dollar. The explanation for some is that the interest-rate premium is getting canceled out by a Trump discount.
Longer-dated U.S. Treasury yields have had record premiums over their German equivalents since late 2014, when the Federal Reserve ended its quantitative easing. More recently, the Fed’s ratcheting up of its policy interest rate has propelled shorter-dated Treasury yields, while the European Central Bank has yet to end its own QE. That’s spurred a record gap for two-year yields, according to data compiled by Bloomberg going back to 1990.
What hasn’t happened is any appreciation in the dollar, which slid more than 12 percent last year against the euro and is down 3 percent so far in 2018. There are several arguments for why the yield premium hasn’t been helping:
- For Europeans, it’s become more expensive to finance and hedge purchases of Treasuries -- thanks to a surge in dollar Libor rates
- As the ECB tapers its asset purchases, it’s driving fewer euro-region fixed-income flows into dollars
- In the equity market, many strategists highlight how cheaper euro-region valuations make them more compelling than American stocks -- more reason for Europeans to keep money at home
Then there’s the effect President Donald Trump’s policies may be having.
His tariff threats against China and others have drawn attention to the widening U.S. trade deficit, similar to the early years of Bill Clinton’s administration, when the dollar also retreated as the yield premium rose. Trump has also browbeaten trading partners not to let their currencies rise. Another concern: rising American indebtedness from his tax cuts.
“Rate differentials are going to matter again one day,” Kit Juckes, a global fixed-income strategist at Societe Generale AG in London, wrote in a note this week. But “what matters now is the nervousness induced by both President Trump’s late-cycle fiscal largesse and his Twitter feed.”
Trump’s latest currency jawboning came with what Juckes termed “eyebrow-raising tweets” charging China and Russia with “playing the currency-devaluation game.”
©2018 Bloomberg L.P.