In my view, markets are not moved by professional bond traders using sophisticated models but by regular people like you and me. People go with investments they expect to be most profitable. I don’t make my investment decisions based on what the government CPI tells me and neither do you. It’s as simple as: will I get better return from a 10-year dollar denominated US treasury bond at 3.78%, or a 10-year euro-denominated Italian treasury bond at 4.5%? or should I put my money into the stock market?
If I think that stock market has hit the bottom, I’ll sell my bonds, dollar yields and euro yields go up.
If I think that dollar will depreciate against euro because US government decides to print its way out of the problem unilaterally, I’ll sell US bonds and buy euro bonds, US bond yields go up, euro bond yields go down.
Since neither seems to be happening, most people probably think that stock market is still going down and that dollar:euro exchange rate won’t move far beyond 1.50. (Or maybe that it might but 0.7% yield difference does not reward them enough for the risk that it doesn’t. USD is still the world’s reserve currency so it benefits whenever theer’s risk involved. )
