In February 2026 the global financial environment tilted toward easing as US Treasury yields fell across the curve and euro-area yields declined in step. According to data published by the Federal Reserve Bank of St. Louis (FRED), the US 10Y Treasury yield fell 24bp month-on-month to 4.020%, and the 2Y yield fell 10bp to 3.420%, narrowing the 10Y-2Y spread from 74bp to 60bp (a 14bp compression). European Central Bank statistics show the euro-area AAA 10Y yield fell 15.6bp to 2.747% and the 2Y yield fell 4.7bp to 2.003%, compressing the 10Y-2Y spread from 85.4bp to 74.4bp (an 11bp compression). Central bank balance sheet dynamics highlighted a transatlantic policy divergence: FRB total assets increased 0.40% month-on-month to $6,613.8 billion, while ECB total assets declined 0.88% month-on-month to €6,234.5 billion. The US–EU 10Y yield differential narrowed from 135.7bp to 127.3bp (an 8.4bp compression), increasing reallocation pressure on global capital flows.
According to data published by the Federal Reserve Bank of St. Louis (FRED), US yields fell across maturities in February 2026. The 2Y yield declined 10bp from 3.520% to 3.420%, the 10Y fell 24bp from 4.260% to 4.020%, and the 30Y fell 20bp from 4.870% to 4.670%. The 10Y-2Y spread compressed from 74bp to 60bp, indicating ongoing yield curve flattening.
Relative to the policy rate, as of January 2026 the Fed Funds (FF) rate was 3.640% while the 2Y yield was 3.520%, implying a policy rate–2Y gap of +12bp. That gap signaled modestly priced-in cuts by the market; the February decline in the 2Y yield likely widened that gap further. However, the FF rate for February 2026 is not provided, so an exact gap calculation is not possible.
The larger decline in long-term yields versus short-term yields implies a concurrent decline in the Nelson–Siegel Level and a compression of Slope. The 24bp fall in the 10Y yield may reflect lower inflation expectations or weaker expected real growth. The 14bp Slope compression suggests market participants have downgraded future expansion expectations and begun to price either the end of the tightening cycle or an earlier start to rate cuts.
European Central Bank statistics show that in February 2026 euro-area AAA 2Y yields fell 4.7bp from 2.050% to 2.003%, and 10Y yields fell 15.6bp from 2.903% to 2.747%. The 10Y-2Y spread compressed from 85.4bp to 74.4bp, indicating yield curve flattening similar to the US.
The ECB deposit facility rate was held at 2.000%. Against January’s 2Y yield of 2.050%, the policy rate–2Y gap was -5bp; against February’s 2Y yield of 2.003%, the gap is near zero (-0.3bp), confirming that markets are pricing policy rate stability.
The larger decline in 10Y yields (15.6bp) compared with 2Y yields (4.7bp) suggests reduced long-term growth or inflation expectations. The 11bp Slope compression may reflect market concern over slowing euro-area growth. Compared with the US (14bp Slope compression), the euro-area Slope narrowing is broadly similar, implying increased synchronization of the business cycle across the two regions.
Japan’s February 2026 government bond yield and BOJ policy rate data are not available, preventing quantitative analysis. As of January 2026, Japan’s 10Y-2Y spread stood at 99.6bp—higher than the US and euro area—and the BOJ call rate – JGB2Y gap was -52bp, indicating that market rates traded well above the policy rate. That suggested market pricing of BOJ normalization, but February developments require additional data.
Level changes: FRED data show the US 10Y fell from 4.260% to 4.020% (24bp), while ECB statistics show the euro-area 10Y fell from 2.903% to 2.747% (15.6bp). Both regions recorded Level declines, with the US decline exceeding the euro-area decline by 8.4bp. This suggests a more pronounced downward revision of inflation or real growth expectations in the US.
The absolute level difference between the US 10Y (4.020%) and euro-area 10Y (2.747%) is 127.3bp, down from 135.7bp the prior month. This convergence results from the faster pace of US long-term yield decline.
Slope changes: The US 10Y-2Y spread compressed from 74bp to 60bp (14bp), while the euro-area 10Y-2Y spread compressed from 85.4bp to 74.4bp (11bp). Both regions experienced simultaneous Slope flattening, consistent with synchronized business cycle signals.
The US Slope compression of 14bp versus euro-area 11bp (a 3bp differential) implies either stronger pricing-in of future US rate cuts or a greater decline in the US term premium. Given the relative declines in 2Y (US 10bp vs euro-area 4.7bp) and 10Y yields (US 24bp vs euro-area 15.6bp), term premium compression in the long end appears notable in the US.
As of January 2026, Japan had the steepest curve with a 10Y-2Y spread of 99.6bp, followed by the euro area at 85.4bp and the US at 74bp. In February, the US curve became the flattest (60bp) while the euro area was 74.4bp. With missing February Japanese data, a full cross-region comparison is incomplete, though January’s ranking suggests Japan likely remained the steepest.
These rankings reflect phase differences in monetary policy cycles: markets began pricing a US easing cycle, the euro area priced policy rate stability, and Japan priced continued normalization.
February 2026 central bank balance sheet dynamics underscored the transatlantic policy split. FRB total assets rose from 6,587.6billionto6,613.8 billion, an increase of $26.2 billion (month-on-month +0.40%). By contrast, ECB total assets fell from €6,290.0 billion to €6,234.5 billion, a decline of €55.5 billion (month-on-month -0.88%).
The FRB’s +0.40% expansion is unusual amid a QT phase since 2023. Whether this expansion reflects temporary technical factors (e.g., increased repo operations, Treasury General Account fluctuations) or signals a policy stance change cannot be determined from a single month’s data. Nonetheless, the month-on-month positive turn suggests a possible slowing or pause in the FRB’s balance sheet normalization.
The ECB’s -0.88% contraction reflects continued redemptions under APP (Asset Purchase Programme) and PEPP (Pandemic Emergency Purchase Programme). A monthly -0.88% pace annualizes to roughly -10%, indicating active ECB balance sheet normalization.
BOJ monetary base data for February 2026 are not available, leaving the three-central-bank comparison incomplete. BOJ monetary base data for January 2026 are also missing, preventing quantitative assessment of Japan’s liquidity stance.
Using approximate exchange rates EUR/USD≈1.08 and USD/JPY≈150 to convert totals, the combined size of the three central banks’ balance sheets fell from 13.38trillioninJanuary2026to13.35 trillion in February 2026—a decline of 0.03trillion(300 billion), or -0.22% month-on-month.
This decline was driven primarily by the ECB’s balance sheet contraction (€55.5 billion ≈ 59.9billion),whichmorethanoffsettheFRB’s26.2 billion increase. Missing BOJ data mean the true change could differ, but within available data the global liquidity stock appears to be on a modest downward trend.
FRED data show US M2 money supply rose from 22,385.0billioninJanuary2026to22,463.0 billion in February 2026, an increase of $78.0 billion (month-on-month +0.35%). The year-on-year growth rate accelerated from 4.22% to 4.38% (a 0.16 percentage point increase), suggesting renewed credit creation.
For the euro area, the year-on-year growth rate of M3 in January 2026 was 3.44%; February 2026 M3 data are not available. The M3 stock as of January 2026 was €17,344.7 billion.
Japanese M2 money stock data for January and February 2026 are not provided, so assessment is not possible.
US M2 acceleration (4.22% → 4.38%) combined with the FRB balance sheet expansion (+0.40%) is consistent with continued liquidity provision into the financial system. Conversely, the ECB balance sheet contraction (-0.88%) alongside euro-area M3 growth of 3.44% (January) suggests private credit creation is partially offsetting ECB liquidity withdrawal.
The US–EU 10Y yield differential narrowed from 135.7bp in January 2026 (US 4.260% - euro area 2.903%) to 127.3bp in February 2026 (US 4.020% - euro area 2.747%), an 8.4bp reduction. This reflects the US 10Y’s larger 24bp decline versus the euro area’s 15.6bp decline.
A 127.3bp spread remains sizeable and preserves relative attraction of dollar assets. However, if the narrowing trend persists, pressure for capital to flow back toward the euro area could increase. With ECB balance sheet contraction (-0.88%) tightening euro-area liquidity, a shrinking US–EU spread would nonetheless improve the relative valuation of euro assets.
As of January 2026 the US–Japan 10Y differential was 201.3bp (US 4.260% - Japan 2.247% estimated), but Japan’s February 2026 10Y yield is unavailable so the February differential cannot be calculated.
The BOJ call rate – JGB2Y gap of -52bp in January 2026 indicated markets were pricing BOJ rate increases. If the BOJ were to raise rates, the US–Japan differential would narrow and impose reversal pressure on yen carry trades. However, US rate declines in February (2Y -10bp, 10Y -24bp) partially offset any differential compression from potential Japanese tightening.
The Japan–euro 10Y differential stood at -65.6bp in January 2026 (Japan 2.247% - euro area 2.903% estimated; negative implies Japan is lower). With missing February Japanese data, February comparisons are not possible.
Euro-area yields have remained above Japan’s, indicating a relatively more accommodative stance in Japan. Should BOJ normalization outpace the ECB, this differential could narrow.
According to the Ministry of Internal Affairs and Communications, Japan’s January 2026 Consumer Price Index (CPI) showed headline CPI at +1.5% year-on-year, core CPI excluding fresh food at +2.0%, and core-core CPI (excluding fresh food and energy) at +2.6%. These rates decelerated from December 2025 (headline +2.1%, core +2.4%, core-core +2.9%).
A core-core CPI of +2.6% exceeds the BOJ’s 2% target by 0.6 percentage points, indicating persistent underlying inflation pressures. However, the downtrend from a July 2025 peak of core-core +3.4% suggests inflation has peaked and is moderating.
These price dynamics align with the January 2026 BOJ call rate – JGB2Y gap of -52bp (market pricing of additional BOJ hikes). While core-core above target leaves room for further normalization, the decelerating trend argues against rapid tightening.
Globally, the US and euro-area long-term yield declines (US 10Y -24bp, euro area 10Y -15.6bp) may reflect lower global inflation expectations. Japan’s CPI deceleration is consistent with this broader disinflationary trend.
Cabinet Office Composite Index (CI) data show that as of September 2025 (latest available), the leading index was 108.0, the coincident index 114.9, and the lagging index 112.3. The leading index rose from 104.5 in April 2025 to 108.0 in September 2025 (a 3.5 point gain), indicating improved near-term growth expectations. The coincident index has trended modestly down from a peak of 117.0 in February 2025, suggesting the current economy is broadly flat to mildly weakening.
These indicators are compatible with the global decline in yields between January and February 2026 (Japanese yield data for that period are missing). The modest improvement in the leading index suggests some probability of recovery, though confidence is limited.
Globally, the drop in long-term yields may also reflect weaker growth expectations. Japan’s mildly weakening coincident index aligns with this global growth softening.
Ministry of Economy, Trade and Industry data show the seasonally adjusted industrial production index was 102.2 as of February 2025 (latest available), up 2.3% month-on-month, rebounding from a -1.1% month-on-month decline in January 2025. However, production has not yet recovered to the October 2024 level of 103.0.
The industrial production series is volatile and shows little clear trend: over the 12 months from March 2024 to February 2025 the index rose only from 101.4 to 102.2 (a 0.8 point increase), indicating manufacturing activity remains in a sideways range.
This production profile aligns with Japan’s constrained financial environment (data limitations notwithstanding) and the global decline in long-term yields. Lower long-term rates reduce corporate funding costs, which can support capital expenditure amid sluggish production.
Bank of Japan Tankan survey data for Q4 2025 (latest) show the large-manufacturing business conditions DI at 15 (expected: 12), large non-manufacturing 34 (expected: 28), mid-sized manufacturing 16, and small manufacturing 6.
Large-manufacturing DI improved from 12 in Q1 2025 to 15 in Q4 2025, indicating gradual improvement in manufacturing conditions. However, the expected DI of 12 for the outlook—3 points below the current DI—suggests firms expect deterioration ahead. Large non-manufacturing DI remains high at 34, but the outlook DI of 28 is six points lower, indicating increasing caution. Mid-sized and small manufacturing DIs improved modestly but remain low.
This corporate sentiment profile is consistent with the global yield decline (US 10Y -24bp, euro area 10Y -15.6bp): lower global growth expectations are reflected in cautious outlooks, while improved current DIs indicate easier financial conditions supporting present activity.
In the base case, global long-term yields continue to drift lower and financial conditions remain tilted toward easing. The US 10Y yield trades near 4.0%, with the 10Y-2Y spread flattening to a 50–70bp range. Euro-area 10Y yields settle near 2.7%, and the US–EU yield differential stabilizes around 120–130bp.
If the FRB’s February +0.40% balance sheet expansion is a temporary technical factor, the FRB balance sheet could resume contraction from March onward, albeit at a slower monthly pace of about -0.2% to -0.3%. The ECB is expected to continue monthly contractions in the 0.8–1.0% range, keeping euro-area liquidity relatively tight.
The BOJ will weigh the CPI deceleration (core-core +2.6%) and flat-to-slow growth and proceed cautiously with further rate rises. Any BOJ hikes are likely to be modest (0.10–0.15 percentage points), limiting market impact.
Under this scenario, gradual narrowing of the US–EU differential continues, supporting slow capital reflows into the euro area. The yen carry trade remains broadly intact given a US–Japan differential near 200bp, though intermittent reversals may occur around BOJ normalization signals.
US 10Y yields fall sharply below 3.5%, and the 10Y-2Y spread approaches zero or inverts. This would be driven by a severe recession or a sharp growth slowdown in the US.
In this scenario the FRB would enact emergency rate cuts and stop or reverse balance sheet reduction. The US–EU yield differential would rapidly compress below 100bp, and the dollar would depreciate versus the euro. The US–Japan differential would narrow below 150bp, triggering a large unwind of yen carry trades and a sharp appreciation of the yen, pressuring Japanese exporters.
Global equity markets would plunge as risk-off flows concentrate into US Treasuries and German Bunds. Euro-area and Japanese long-term yields would also decline, though likely not as far as US yields, accelerating relative spread compression.
If euro-area inflation reaccelerates or fiscal concerns mount, the ECB could unexpectedly hike or accelerate balance sheet reduction. Euro-area 10Y yields could rise above 3.0%, compressing the US–EU differential to below 100bp.
The euro would strengthen versus the dollar and attract capital inflows to Europe. However, tighter euro-area financial conditions could damp growth and raise recession risks. A rapid ECB balance sheet contraction (monthly >1.5%) could drain market liquidity and widen peripheral spreads.
Impacts on Japan would likely be limited, though a global rise in risk aversion could lift the yen as a safe-haven.
If stronger-than-expected CPI or wage gains prompt the BOJ to tighten faster than markets expect, policy rates could rise above 0.5% and the 10Y JGB yield exceed 1.5%. The US–Japan differential could fall below 250bp.
Such a shock would trigger a large unwind of yen carry trades and a sharp yen appreciation to the 120 JPY/USD area, materially hurting exporters and triggering equity market adjustments. Yen appreciation would also reduce import prices and could slow CPI, potentially damping BOJ tightening momentum.
Global markets could see a chain reaction of risk-off moves, pressuring US and European equities and forcing FRB/ECB to reassess policy stances.
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Fed Funds rate developments: February 2026 FF rate data are missing, so the relationship between FOMC decisions and market yields in March is critical. The policy rate–2Y gap will be key to assessing FRB stance.
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FRB balance sheet trajectory: Confirm whether the February +0.40% expansion is a temporary technical event or the start of a policy shift by reviewing March and subsequent data.
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Japanese rates and policy data: Publication of February 2026 JGB yields, BOJ policy rate, monetary base, and M2 money stock is necessary to reassess Japan’s liquidity and rate outlook.
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Euro-area M3 growth: February 2026 M3 growth will indicate whether private credit creation sustains euro-area liquidity amid ECB balance sheet contraction.
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US–EU yield differential direction: Continued narrowing from 127.3bp or reversal will influence global capital flows. A break below 100bp is a significant threshold.
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Japan CPI developments: Post-February CPI data will determine whether the deceleration continues. If core-core CPI falls below 2.0%, arguments for further BOJ hikes weaken.
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Coincident/leading indexes and industrial production: Updates from October 2025 onward will help reassess Japan’s current and prospective economic momentum. Continued leading index gains would support recovery expectations.
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BOJ Tankan Q1 2026: Whether the outlook DI improves or remains cautious will influence corporate growth expectations.
Data sources
- Source: Federal Reserve Bank of St. Louis (FRED), https://fred.stlouisfed.org/
- Source: European Central Bank, Statistical Data Warehouse
- Source: Ministry of Finance, Government Bond Yield Information
- Source: Bank of Japan, Time-Series Data
- Source: Ministry of Internal Affairs and Communications, Consumer Price Index
- Source: Cabinet Office, Composite Index (CI)
- Source: Ministry of Economy, Trade and Industry, Industrial Production Index
Taylor rule: A theoretical guideline for setting a central bank’s policy rate based on deviations of inflation and output from targets. The gap between the rule-implied rate and the actual policy rate indicates the degree of monetary easing or tightening.
Nelson–Siegel model: A statistical model describing the yield curve using three components: Level, Slope, and Curvature. Level captures the long-term rate, Slope captures the short–long spread, and the model is closely linked to business cycle signals.
Term premium: The component of long-term yields that exceeds the expected path of short-term rates, reflecting compensation investors require for interest rate risk and liquidity risk.
Policy rate–2Y gap: The difference (in basis points) between a central bank’s policy rate and the 2-year government bond yield. A positive value indicates markets are pricing rate cuts; a negative value indicates markets are pricing hikes. It is a quantitative indicator of monetary stance.
Yield curve flattening: A reduction in the spread between long-term and short-term yields (particularly the 10Y–2Y spread). It often signals rising recession risk or growing expectations of rate cuts. Yield curve inversion is a well-known recession indicator.
QT (Quantitative Tightening): Abbreviation for Quantitative Tightening. A policy in which a central bank reduces its balance sheet by allowing assets to redeem without reinvestment or by selling assets, thereby absorbing liquidity. The counterpart of QE (Quantitative Easing).
Yen carry trade: A financing strategy that borrows in low-yielding Japanese yen to invest in higher-yielding assets denominated in other currencies. Wider US–Japan yield differentials increase potential returns but expose investors to large unwind risk if the yen sharply appreciates.
M2/M3 money supply: Measures of the monetary aggregate in an economy. M2 includes currency, deposits, and near-money; M3 includes M2 plus broader instruments like institutional money market funds and certain bank liabilities. Their growth rates reflect credit creation and liquidity in the economy.
Core CPI / core-core CPI: CPI measures excluding volatile components. Core CPI excludes fresh food; core-core CPI excludes both fresh food and energy. These measures are used to assess underlying inflationary pressure.
Composite Index (CI): An index combining multiple economic indicators into a single measure of economic activity. The leading index forecasts future activity, the coincident index reflects current activity, and the lagging index confirms past trends. Published monthly by the Cabinet Office.
BOJ Tankan business conditions DI: Diffusion Index from the Bank of Japan Tankan survey. It equals the percentage of firms reporting 'good' minus those reporting 'poor' conditions; higher positive values indicate a more favorable business environment.
This column was automatically generated by AI integrating data from the Federal Reserve Bank of St. Louis (FRED), the European Central Bank (ECB) Statistical Data Warehouse, Japan Ministry of Finance, and Bank of Japan statistics as a global fiscal and liquidity analysis resource. This is not a recommendation to buy or sell any financial instruments. Please make investment decisions at your own responsibility and consult professionals as needed.
