MBA Chart of the Week: How are U.S. 10-Year Rates Impacted by Global Trends?

A vote by Britain to “leave” Europe could be highly disruptive this week, both for financial markets and for global trade, and would likely cause a flight to quality into safe assets, such as U.S. and German bonds.   

It’s notable that the 10-year German bond moved into negative territory this past week. Does that mean U.S. rates may be headed in the same direction? This week’s chart examines the factors that have typically been drivers of the spread between 10-year U.S. and German bonds.   

Historically, U.S. and German yields were quite comparable, with U.S. rates lower than German rates as recently as 2009. Typically, the spread appears to have been driven by changes in “fundamentals,” if the U.S. economy grew relatively more quickly or had higher inflation, the spread widened, if the reverse, it narrowed. However, from 2009 on, the spread has consistently widened, and the widening does not appear to be driven by “fundamentals,” rather the “trend” component has been driving the spread widening.   

That means the spread has widened not due to economic fundamentals, but due to policy, demographic factors and expectations about future growth that were not explicitly captured in the model. The European Central Bank’s move to negative rates, the cycle of sovereign debt concerns, and a more fraught political environment may all be factors. Whatever the cause, it suggests that U.S. yields may not be as responsive to a change in German yields as in the past.   

Nonetheless, tighten your seat belt this week–the Brexit vote will likely result in substantial financial market volatility whatever the result.  

To view the Chart of the Week, click  

(Michael Fratantoni is chief economist and senior vice president of research and economics with the Mortgage Bankers Association. He can be reached at Lynn Fisher is vice president of research and economics with MBA; she can be reached at Joel Kan associate vice president of economic forecasting with MBA; he can be reached at