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Europe’s Weaker Economy Limits Fallout of US Bond Rout

 A big selloff that pushed U.S. borrowing costs to 15-year highs left euro zone bonds relatively unscathed in August, reflecting investor bets the bloc’s economic growth and funding needs will increasingly lag those in the United States.

A resilient U.S. economy and rising borrowing needs pushed Treasury yields to their highest in over 15 years in August amid growing expectations that interest rates would stay higher for longer. Furthermore, U.S. inflation-adjusted borrowing costs rose above 2% for the first time since 2009, hurting stocks and pushing up borrowing costs globally.

European bonds, however, were less affected and it is not hard to see why.

While the U.S. economy, which grew 2.4% last quarter, has delivered a string of positive surprises, sharp contractions in business activity last week pointed to deepening economic pain in Europe.

“In the U.S., we went from expectation of a recession at the end of the year to recent solid economic data,” said Mauro Valle, head of fixed income at Generali Investment Partners.

“In Europe, we went from a positive economic trend a couple of months ago to more negative data,” Valle said.

Bond markets reflect the two regions’ diverging economic fortunes and rate expectations.

Benchmark 10-year Treasury yields, though down from their highs at month-end, were still set to end August with a rise of 17 basis points, while 10-year yields have risen just 4 basis points in Germany , the euro zone’s benchmark, and by 11 bps in Britain .

Source : Reuters