One of the biggest surprises this year has been the sharp decline in long term interest rates despite the Federal Reserve’s monthly removal of $10 billion in bond purchases to gradually reduce quantitative easing. Numerous market commentators have put forth explanations for the rate decline, touching on short covering, limited supply, economic woes, weather etc. A factor which has only been partly discussed is the correlation between European rates and US rates, especially the link between the German Bund and the US 10- year Treasury. These two have been loosely tethered to one another for more than 25 years. In the last sovereign debt crisis during the summer of 2012 Italian and Spanish long term rates stood at 7%, and have since dramatically declined, ending last year yielding 4.1%.
Investors and traders keep watching the Federal Reserve’s Open Market Committee for new signals on monetary policy but the curtains remain closely drawn. The statement issued by the FOMC Wednesday after its two-day meeting shed little light from the March 19 meeting. Other than the first paragraph, the statement was identical to the one released after the March meeting, said Sterling Smith, futures specialist and vice president for Commodity Research at the Citibank Institutional Client Group in Chicago.