The correlation between US and EU interest rates has decreased, and the interest rate spread between the US and EU may further widen.

Recent market data shows that since the 2024 U.S. presidential election, the correlation between U.S. and European interest rates has significantly decreased. Analysts point out that this trend may lead to further widening of the interest rate differential between U.S. Treasury bonds and Euro interest rates. According to the latest research report from ING, the tariff policies of the Trump administration have triggered different inflation expectations globally, thereby affecting the trends of U.S. and European interest rates. U.S. tariff policies often create upward pressure on domestic inflation, while affected countries may face deflation risks. This differentiated impact has strengthened the independence of European interest rates, leading to an expanding trend in the U.S.-Euro interest rate differential. The report notes that since Trump was elected, the daily changes in the 2-year Euro swap rate have no correlation with the 2-year U.S. Treasury yield. In terms of longer-term rates, the daily changes in the 10-year Euro swap rate are also significantly less influenced by the 10-year U.S. Treasury yield. Before the November 2024 U.S. presidential election, over 50% of the changes in the 10-year Euro swap rate could be explained by changes in the U.S. Treasury yield, but currently, this proportion has dropped to 14%. Against the backdrop of diverging monetary policies between the Federal Reserve and the European Central Bank, the market expects short-term interest rates in the Eurozone to further decline in the short term, thereby increasing downward pressure on long-term interest rates and causing the U.S.-Euro interest rate differential to continue widening. Currently, the spread between the 10-year Euro swap rate and the 10-year SOFR (Secured Overnight Financing Rate) swap rate has reached 175 basis points, close to the peak of 185 basis points in 2018. Additionally, the policy outlook of the European Central Bank has become a focus of market attention. Faced with weak economic data, the market expects the ECB to cut interest rates in the future, while the Federal Reserve maintains a relatively hawkish stance amid strong economic data. This further reinforces the divergence in U.S. and Euro interest rate trends. Economic data to be watched in the market this week is limited, with the main focus on the U.S. NFIB Small Business Optimism Index, which was released today showing a 2.3 point drop to 102.8. Additionally, the market will be watching Federal Reserve Chair Powell's congressional testimony for more guidance on future monetary policy. Meanwhile, there is significant supply pressure on Eurozone and UK government bonds this week, with the EU expected to raise 10-11 billion euros through two bond issuances, Italy planning to issue a new 15-year government bond worth around 10 billion euros, and the UK planning to issue approximately 12 billion pounds of 10-year government bonds.