Continued inflation in the EU coupled with strong German data and fears Germany will have to up borrowing to bailout its neighbors have all combined to drive up yields in Germany over the course of the month of January.
The euro has responded to the narrower differentials between US and German yields, recouping roughly 60% of the ground lost since the Irish crisis under cut the Euro in the beginning of November.
When EUR/USD was at 1.4280 back in early November, yields were a mere 8 bp higher in the US than Germany. We peaked at 56 bp just before the ECB signaled a renewed inflation focus and it has contracted rapidly ever since. EUR/USD has rallies right along with those contracting yields.
Today we are down to a 19 bp spread in favor of the US.
