US and European 10-year yields have dropped significantly today. Germany’s yield fell to 2.615%, down by 6.3 basis points. France’s yield is now at 3.295%, decreasing by 9.0 basis points, and the UK dropped to 4.613%, down by 6.0 basis points. Switzerland’s yield is at 0.423%, a reduction of 5.0 basis points. Spain’s yield has fallen to 3.217%, down by 16.9 basis points, while Italy’s stands at 3.484%, down by 8.0 basis points. These changes in European yields come as the European Central Bank (ECB) prepares for its announcement and the release of flash PMI reports for the eurozone. Even after recent measures, the ECB is expected to keep rates stable. The euro remains strong, and inflation is low. Since last Thursday, the euro-dollar exchange rate has risen, currently trading at 1.17159, above its 200-hour moving average.

US 10-Year Yield Decrease

The US 10-year yield dropped by 7.3 basis points, reaching 4.357%. This year, it has decreased by 21.5 basis points. For European 10-year yields, Germany is up by 25 basis points, France by 10, the UK by 3.2, Switzerland by 13.2, Spain by 15, and Italy down by 6.6. The rise in long-term yields presents a challenge for overall financial conditions. The sharp drop in bond yields signals a key opportunity based on the growing gap between the US and European markets. Data indicates that US borrowing costs are on a downward trend, while Europe’s remain high despite central bank actions. This supports our strategy to bet that US rates will fall quicker and further than those in Europe. We consider the spread between the US 10-year Treasury and the German 10-year bund—currently about 1.75 percentage points—a vital indicator. Historically, this gap narrows when the market expects the Federal Reserve to cut rates more aggressively. Recent US inflation reports show a softer 2.7% annual rate for May, suggesting further tightening of this spread in the coming weeks.

Currency Market Signal

The currency market is sending a clear message, with the EUR/USD breaking through important technical levels like the 1.1658 moving average. We see this as evidence of US dollar weakness and are using options to target the 1.1725 resistance level identified in our analysis. This approach allows us to benefit from upward momentum while managing risk ahead of this week’s ECB decision. Mr. Michalowski’s comments about the August 1 tariff deadline and political tensions remind us to brace for potential volatility. The CBOE Volatility Index (VIX) has been relatively low, hovering in the 12-14 range, indicating market complacency. We are acquiring protection through put options on broad market indices to guard against any surprises from ongoing trade discussions. His insight into European yields rising this year despite rate cuts underscores an important market trend. It shows that central bank policy isn’t the only factor, prompting us to avoid oversimplified bets on rate directions. Instead, we are focusing on relative value trades, such as preferring Italian debt over German debt, to take advantage of the economic differences within the Eurozone. Create your live VT Markets account and start trading now.

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