In terms of global central bank policy, it seems that the Fed has been leading a game of “follow the leader,” especially when it comes to European Central Bank (ECB) decision-making. Of course, the Bank of Japan is strumming monetary policy to an entirely different tune and has yet to get on the tightening train, but that’s a whole other topic for discussion.

Last week, both the Fed and ECB implemented 25-basis-point (bp) rate hikes. For Powell & Co., this was their second consecutive quarter-point move, while for ECB President Lagarde and her team, this represented a downshift from their prior pace of 50-bp moves. Interestingly, a similar pattern was observed last year when the Fed moved from a half-point rate hike last May to three-quarter-point increases and then back to 50-bp again, a trend that was also followed by the ECB. In addition, at the ECB’s May meeting, it was also announced that the eurozone policy makers would discontinue reinvestments for their asset purchase program (APP) as of July, akin to their own version of balance sheet management.

Another similarity is both Powell’s and Lagarde’s emphasis on inflation still being too high, but that might be where the comparisons finally end. While the Fed kept its options open for the potential for future rate hikes, the bar for such a move has definitely been elevated, and at the Powell presser, the chairman guided the markets toward the Fed now moving more into “pause” mode. In contrast, at the Lagarde presser, the president stated, “It’s very clear that we are not pausing.” However, it is reasonable to assume the ECB will ultimately go down the pause route as well.

What has seemingly gone under the radar is the yield relationship between the U.S. Treasury (UST) 10-Year note and the German 10-Year bund during this tightening cycle. While there’s little doubt the overarching trend for each of these government securities has been one of rising yields since the rate hike process got underway last year, the difference in their respective yield levels has been reduced rather noticeably. Indeed, as of this writing, the UST/bund spread came in at +119 bps. This compares to a mean, or average, reading over the last five years of +187 bps, a nearly 70-bp reduction. In fact, as recently as November 2018, this spread hit a peak reading of nearly +280 bps!

Interestingly, when UST yields were low in the pre-COVID-19 era, oftentimes the UST/bund yield differential was cited as one of the key reasons, as not only was the spread working in the UST 10-Year’s favor, but the 10-Year bund yield was in negative territory. That begs the question: could the reverse be true, i.e., could this narrowing in UST/bund spreads work against the Treasury 10-Year? Well, based on recent price action in the Treasury market, one could make the argument that it’s not happening yet.

Perhaps the bottom-line message is that there are other more powerful forces to consider when evaluating where the UST 10-Year yield could be going and that yield differentials fall into the secondary or tertiary category on this front, at least for now.