A big selloff that pushed U.S. borrowing costs to 15-year highs left euro zone bonds relatively unscathed in August, reflecting investor bets the bloc's economic growth and funding needs will increasingly lag those in the United States. A resilient U.S. economy and rising borrowing needs pushed Treasury yields to their highest in over 15 years in August amid growing expectations that interest rates would stay higher for longer. Furthermore, U.S. inflation-adjusted borrowing costs rose above 2% for the first time since 2009, hurting stocks and pushing up borrowing costs globally.
FILE PHOTO: Illustration shows U.S. Dollar and Euro banknotes - A big selloff that pushed U.S. borrowing costs to 15-year highs left euro zone bonds relatively unscathed in August, reflecting investor bets the bloc's economic growth and funding needs will increasingly lag those in the United States.
"In Europe, we went from a positive economic trend a couple of months ago to more negative data," Valle said.Benchmark 10-year Treasury yields, though down from their highs at month-end, were still set to end August with a rise of 17 basis points, while 10-year yields have risen just 4 basis points in Germany, the euro zone's benchmark, and by 11 bps in Britain.
Fitch Ratings, which stripped the U.S. of its prized AAA credit rating in early August citing fiscal pressures, expects the U.S. government deficit to rise to 6.3% of gross domestic product this year, and 6.6% next year, from 3.7% in 2022, and widen further thereafter. Bigger fiscal deficits lead to more borrowing, resulting in higher interest rates and lower bond prices.BofA, Goldman Sachs and Barclays expect Treasury yields to end the year slightly below current levels. Yet last week's Jackson Hole central banking symposium signalled growing concern that a strong U.S. economy could force the Federal Reserve to raise rates further than markets now expect, which would drive up borrowing costs elsewhere.
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