Andrew Harrer | Bloomberg | Getty Images
President Donald Trump and Angela Merkel, Germany’s chancellor, right, stand for photographs at the West Wing of the White House in Washington, D.C., on Friday, April 27, 2018.
The spread between the 2-year yield on U.S. and German bonds has hit its widest level since March 1989.
At one point Wednesday, the spread reached 314 points. The last time that number happened, the Berlin Wall was still in place and Madonna’s “Like a Prayer” ruled the airwaves.
Robust data in the United States has pushed yields higher as investors bet that the Federal Reserve will stay the course to raise rates three times this year.
After the Fed already approved a one-quarter point-hike in March, the market is now pricing in a 95 percent chance of a June increase, 72 percent chance for September.
Travis Spence, EMEA Head of Fixed Income Investment Specialists at JPMorgan Asset Management goes further, saying he expect’s the Fed to increase 4 times this year.
“The combination of fiscal stimulus in US, expected to add 0.5% to GDP and bring run rate by year end to around 3%, and the strong April retail sales print this week, caused a re-pricing in Fed expectations,” he said by email Wednesday.
Added to that, the unemployment rate in the U.S. has dropped to 3.9 percent, a figure not seen since 2000, triggering estimates that wage inflation is set to rise.
With U.S. yields rising, there has been some sell-off in the equity market as market players factored in the likely higher cost to corporates as well as the increased attractiveness of bonds.