Global Bonds Rally

Government bonds rallied around the world as monetary policy makers in Europe, the U.K., and Canada assume more-stimulative postures amid concern that falling prices for oil and other goods pose a growing threat to economic growth.

Longer-maturity debt gained, with yields in Germany, Spain, and Switzerland reaching record lows after the European Central Bank (ECB) announcement of a larger-than-forecast bond purchase plan, the Bank of Canada's unexpected lowering of its benchmark rate, and Bank of England policy makers dropping a call for a rate increase. U.S. yields also approached all-time lows with the Federal Reserve forecast to hold interest rates at virtually zero next week.

“The central banks have been pushed to justify their existence,” said Richard Gilhooly, an interest-rate strategist in New York at Toronto-Dominion Bank's TD Securities unit, one of 22 primary dealers that trade with the Fed. “They've gone into no-man's land.”

The U.S. 30-year yield fell eight basis points this week, or 0.08 percentage point, to 2.38 percent in New York, according to Bloomberg Bond Trader prices. The 3 percent security maturing in November 2044 rose 1 25/32, or US$17.81 per $1,000 face amount, to 113 9/32. The yield fell for a fourth week and reached a record low 2.35 percent on Jan. 21.

The effective yield for the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index fell to a record-low 1.14 percent Jan. 19. Treasuries have returned 1.7 percent this year, according to the Bloomberg U.S. Treasury Bond Index, after adding 6.2 percent in 2014.

The U.S. will sell $26 billion in two-year notes, $35 billion in five-year notes, and $29 billion in seven-year debt on three consecutive days starting Jan. 27. The two-year sale was reduced by $1 billion from the prior auction, further limiting the amount of high quality debt available.

Hedge-fund managers and other large speculators reduced positions that profit from a decline in 10-year note to the least since November, U.S. Commodity Futures Trading Commission data showed. Net-short positions totaled 145,598 contracts as of Jan. 20.

U.S. 10-year note yields, which offer 0.87 percentage point more than other Group of Seven nations, fell to 1.80 percent in their fourth weekly drop. Germany's 10-year yields reached a record-low 0.345 percent Friday, and the nation's five-year yield dropped below zero.

“Everything seems to be bullish for Treasuries,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut.

ECB Demand

The ECB will buy government bonds as part of an asset-purchase program worth about 1.1 trillion euros ($1.23 trillion), or 60 billion euros a month, President Mario Draghi announced Jan. 22 in Frankfurt, sparking a jump in European bonds. Along with Canada, Denmark cut interest rates this week, while the Bank of Japan boosted a lending program and stuck to its plan to increase the monetary base at an annual pace of 80 trillion yen ($680 billion).

The International Monetary Fund cut its outlook for consumer-price gains in advanced economies almost in half to 1 percent for 2015, the Washington-based lender said Jan. 19. The core U.S. personal consumption expenditure is forecast to advance 1.6 percent in 2015, below the Fed's 2 percent target.

Italian and Spanish government 10-year debt traded at lower yields than Treasuries, while the euro fell to its lowest level versus the dollar since 2003, boosting the appeal of U.S. government securities.

“The yield declines are all the more gasp-inducing,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “Treasuries still lag the global rally. You'll see people re-evaluating their portfolio objectives the longer yields continue to shrink.”

The chance of a Fed interest-rate increase by its October meeting was 52 percent, futures data show, down from 72 percent at the end of 2014. The central bank has kept its target for the federal funds rate at zero or 0.25 percent since 2008 to support an economic recovery.

Investors have been buying U.S. debt even as Fed Chair Janet Yellen has signaled that momentum in the labor market will likely enable the central bank to increase interest rates this year. The Federal Open Market Committee meets Jan. 27-28.

“All but the Fed seem to be on the move to add stimulus and not to show tightening,” said Michael Pond, head of global inflation-linked research at Barclays Plc, a primary dealer. “What we're seeing is a lack of risk-taking.”

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