European government bonds witnessed a relatively muted selloff in August despite a major rise in U.S. Treasury yields, reflecting differing economic and fiscal prospects across the Atlantic.
While the U.S. economy has surprised to the upside, recent data points to deepening pain in Europe. This comes as analyst expectations shift from a potential eurozone recession to weaker growth.
In addition, eurozone deficits are projected to steadily narrow over the long-run, contrasting with the U.S. where fiscal shortfalls are expected to widen significantly due to ongoing spending.
As a result, benchmark German and other core yields increased far less than their U.S. counterparts in August. Yields have even declined in some cases as the ECB is seen delaying rate hikes.
Looking ahead, spillovers from higher U.S. borrowing costs could tighten overall financial conditions. However, the diverging growth and fiscal trajectories between the regions mean European bonds still appear insulated for now. Investors are also focusing more on individual economy fundamentals.
