10-year sovereign bond yields between 2011 and 2016

Spain Italy Germany United States France










2011 2012 2013 2014 2015 2016

Source: Bloomberg.

Interest rates: a new low reached in 2016

In difficult conditions over the first half of the year, and with central banks still ready to ease their policy in adverse circumstances, long-term interest rates continued their downward trend, and Germany s 10-year yield even dipped into negative territory in June (-0.18%). France s 10-year OAT yield reached a historic floor of just 0.10%.

Having low medium-to-long-term interest rates is good for public finances, reducing the debt burden and thereby increasing fiscal leeway.

Interest rates reversed their trend in the second half of the year, supported by a stronger global economy and upturn in commodity prices. Developed countries inflation should automat- ically rise in 2017 through its energy component.

The election of the new US president in early November amplified the upward trend for sover- eign bond yields. The announcement of a fiscal stimulus policy in an economy whose cycle is already well advanced should, in theory, heighten inflationary pressures in the United States.

The US 10-year yield climbed 1.05%, from 1.4% to 2.45%, over the second half of the year. In its wake, France s 10-year yield gained 0.6%, up

from 0.1% to 0.7%. Over the full year, the former moved 0.2% higher, while the latter shed 0.3%.

The short-term yield spread between the euro- zone and the United States was very wide in 2016 at nearly 2%, the differential being between 2-year yields of -0.8% in Germany and +1.2% in the United States. Such a gap can be attributed to divergence between the monetary policies of the Fed (being normalised, albeit very gradually) and the ECB (fully accommodative and, for the moment, with no real prospect of normalisation).

Currencies: euro down further, sterling weaker too

On the foreign exchange market, the euro lost about another 3% to the dollar in 2016, dropping from 1.086 to 1.052. This was the third consecu- tive year in which the euro depreciated, having seen its value against the dollar fall by 12% in 2014 and then 10% in 2015.

This trend actually reflects a significant appre- ciation of the dollar, which has gained 20% since mid 2014 in effective terms, i.e. adjusted for the weight of trade with partners, and for inflation. The real effective exchange rate of the euro declined by just 8.5% over the same period.