Source: Bloomberg

The chart shows the relationship of 10-year US Treasury yields to German 10-year Bund yields during the past two years. They moved in a straight line relationship until the US election last November, when US yields jumped to a higher track.

Bond purchases by the European Central Bank are suppressing European yields, but that can’t go on forever. Germany reluctantly allowed ECB President Mario Draghi to pursue quantitative easing after the 2014 Eurocrisis. Now that the European economy is growing at least as fast as the US economy, quantitative easing is past its use-by date.

We don’t expect any dramatic changes until the German elections in September. The most likely result is a coalition between Angela Merkel’s Christian Democrats and the small Free Democratic Party, followed by a substantial fiscal stimulus. Germany can then tell the rest of Europe that it has done its part to reduce its budget surplus and trade surplus, and that monetary stimulus must be phased out.

The Germans are savers and are chafing under negative interest rates up to the 7-year point in the German yield curve. They want higher rates–and they will get them.