European bond yields are drifting lower, but researchers warn that could flip fast if the Fed makes one specific move.
The published research consensus this week is modestly constructive for European bond prices: German 10-year Bund yields just closed at their lowest level since mid-March, with analysts pointing to falling crude oil prices easing inflation expectations across developed markets.
A contrarian thread of recent research flags a clear risk to that view. If the Fed — now under Chair Kevin Warsh — signals a meaningful shrinking of its bond portfolio, some analysts argue the resulting rise in US term premia would spill into eurozone yield curves and steepen them higher.
On ECB policy, researchers note markets are still pricing at least one more rate hike, in line with recent hawkish central bank communication, even as inflation swaps drift lower on cheaper energy.
The two camps aren't really in conflict: one describes the tactical present, the other a conditional scenario. Absent a Fed catalyst, the base case stays subdued yields.