News of financial incentives coming from the USA stands out. Increasing US Treasury returns seem to have become the main theme of the market. Yellen strongly supported fiscal expansion, saying that a strong fiscal package would return the US to full employment by 2022; The 1.9 trillion USD package stands at an important point in terms of supporting SMEs where employment is lost to a great extent and creating demand in the economy by correcting the distortion between economic layers. Of course, after this stage, the trend in the global USD movement and US bond rates will be determined by the fiscal incentive effect and the Fed's additional asset purchase potential, so it will be likely that we will see cyclical slowdowns and subsequent value gains.
While Italian bond yields are on the decline due to the optimism of Draghi's technocrat government, German bond yields have been on the rise for some time, just like the American 10-year ones. While we can explain the movement of the American 10 year yields with the expectations of financial incentives and warming in the economy, it is difficult to understand the increase in German interest rates, which we can call the benchmark of Europe, which is experiencing a deeper recession. We see the Italian - German interest spread in the chart. Draghi, known as the euro currency's savior in the debt crisis period, has a positive effect on Italian borrowing costs and thus the spread has narrowed in favor of Italian bonds. Of course, it should be remembered that the German 10-year-olds are still in the negative zone. According to EU rules (Maastricht criteria), no country can have a budget deficit greater than 3% of GDP or debt more than 60% of output, and those outside these limits set annual targets to show that they are moving towards the right targets and they have to abide by them. Italy is the most indebted country in Europe, along with Greece, with a debt ratio of 150% of GDP. The pandemic crisis once again causes the discussion of the deletion of some debts that are very difficult to structure in the long run.
Fiscal incentives, vaccination and the ability of the Fed's increase in asset purchases can make the US recover faster than Europe, as well as increase the risks in terms of overheating inflation. Discussions about the size of the package generally revolve around this. But the Biden management tendency will be to do most of the things that can be done, and control the side effects, rather than doing less. The situation of interest rates may also lead to changes in the Fed's policy tendency, especially in buying more bonds for certain maturities. If the yield curve becomes too steep, it will be an indication that inflation concerns have increased in the longer term.
