Source: Bloomberg

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US Treasury securities weakened after their initial positive response to the employment report. That’s a tail-wags-dog story: Weaker-than-expected earnings growth should have buoyed the bond market, and initially did so.

The impetus for higher rates, though, came from Europe: the standard statistical test for information precedence applied to 1-minute interval tick data (Granger Causality) indicates that a snapback in German yields dragged US yields along with it. Europe is under stress: although German 10-year yields are up only 1.2 basis points on the day, Italy is out 7.4 basis points, Portugal by 7 basis points and Spain by 4.7 basis points.

The trading profile suggests that the market expects a gradual end to European Central Bank ease, with corresponding pressure on the European peripherals (the “Club Med” countries) that have benefited most from quantitative easing (that is, massive buying of government debt). The Germans never believed that ECB chief Mario Draghi’s quantitative ease had much to do with restoring economic growth: Draghi, a top German official said, is a “charlatan” who used the ECB’s balance sheet to bail out Italy. The widening of the spread between German Bunds and Italian BTPS is not a reassuring sign. The American dog meanwhile is being wagged by the German tail.

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