U.S. 10-Year Yield Spread Versus Germany And Japan

Includes: DTYL
by: Pat Stout

German versus U.S. 10-year yield spread.

Japan versus U.S. 10-year yield spread.

U.S. GDP growth versus German-U.S. 10-year yield spread.

The real prime rate has increased.

Might the Federal Reserve have a problem on its hands as the real prime rate has been increasing making it more expensive for business to borrow? Looking at U.S. Treasury yields and some corporate bond yields the idea that money has gotten more expensive would seem misplaced, wouldn't it?

The chart below shows the bank prime rate less the yearly change in the CPI. It has been moving higher. The real prime rate has increased and has hit multi-year highs. This development, in part, might help explain the sluggish economic growth. What do you think?

The chart below compares the prime rate with the 10-Year yield. Notice how stable the spread was in the 1950's and 1960's.

The chart below shows the longer-term 10-year yield spread of U.S. and Japanese bonds.

The chart below shows the 10-year yield spread of U.S. and German bonds.

What happened with U.S. economic growth when the 10-year yield spread with German bonds was increasing? Did you notice that the 10-year spread increased during the 1990's when the U.S. economy was performing well? The chart below shows that a widening yield spread was accompanied with good economic performance while a narrowing of the spread was meet with decelerating economic performance.

PowerShares has a DB German Bund ETN (NYSEARCA:BUNL) and is compared with the iShares Barclays 20+ Year Treasury Bond (NASDAQ:TLT) and the iShares Barclays 7-10 Year Treasury (NASDAQ:IEF) in the charts below.

BUNL Chart

BUNL data by YCharts

BUNL Chart

BUNL data by YCharts

Bottom line:

History has proven that the U.S. economy can expand while the 10-year yield spread versus German bonds expands. The European deflationary environment might have some impact on U.S. interest rates but it does not necessary suggests that U.S. interest rates need to, or will, head lower too. The past performance of the U.S. bond market has been outstanding and has many dumbfounded. The past performance has been driven by capital appreciation rather than coupon income. Though should interest rates stabilize and head slightly higher the total return on bonds will be higher than expected due to the reinvestment of coupon income at higher rates of interest. It is a bond math thing.

Thought of the Day:

Might the low bond yields see a shift by pension funds into higher yielding common stocks?

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.