Treasury Bulls Score $166 Billion Windfall With Help From Draghi

(Corrects to clarify nature of split on ECB Council.) Sept. 4 (Bloomberg) -- European Central Bank President Mario Draghi talks about the decision to start purchasing asset-backed securities and the disagreement among Governing Council members over the program. He speaks at a news conference in Frankfurt after the central bank reduced all three of the ECB's main interest rates by 10 basis points. (Source: European Central Bank)

Remember last year’s taper tantrum, when investors fled bonds in the face of less Federal Reserve stimulus?

That now seems like a quaint exercise unlikely to be repeated anytime soon. Even though the U.S. central bank is winding down its debt buying, there’s a new gorilla in the room: the European Central Bank.

President Mario Draghi is pumping more and more cash into the global bond market, taking the lead in a race to lower borrowing costs. The ECB said today it plans to buy securitized debt and covered bonds, and it surprised analysts by dropping all three of its main interest rates by 10 basis points.

“In the last several months, the European bond market has been a very dominant force on U.S. yields,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. As for which type of bond has benefited the most, he said, “the longer the better.”

Treasuries maturing in more than 15 years have returned 16.7 percent so far this year, the most for the period since 2011. That’s equal to about $166 billion worth of gains, Bank of America Merrill Lynch data show.

BlackRock ETF

Draghi’s stimulus is helping keep a lid on borrowing costs in the U.S. even as the growth outlook continues to improve. The nation’s joblessness fell to 6.2 percent in July from 6.7 percent in December, yet yields on the benchmark 10-year Treasury note have also tumbled from 3.03 percent at year-end. The securities yielded 2.45 percent at 10:59 a.m. in New York, up 0.05 percentage point from yesterday.

Photographer: Martin Leissl/Bloomberg

The headquarters of the European Central Bank in Frankfurt. Close

The headquarters of the European Central Bank in Frankfurt.

Photographer: Martin Leissl/Bloomberg

The headquarters of the European Central Bank in Frankfurt.

Instead of girding for rising interest rates as the economy strengthens, investors have been pouring cash into long-dated U.S. debt.

They’ve funneled $3.9 billion into BlackRock Inc. (BLK)’s iShares 7-10 Year Treasury Bond exchange-traded fund this year, the most among U.S. fixed income ETFs, Bloomberg data show. The fourth-biggest winner has been the iShares 20+ Year Treasury Bond ETF (TLT), with $1.7 billion of deposits.

Analysts keep cutting their predictions for how much borrowing costs will rise, too. They now forecast a 2.89 percent yield on the 10-year Treasury note at year-end, down from a July call of 3 percent, according to a Bloomberg survey.

Relative Value

That’s in part because the debt looks pretty attractive relative to the opportunities abroad: The U.S. benchmark 10-year note yielded today the most versus its Group of Seven counterparts since 2007. Last month, when yields on 10-year German debt dropped below 1 percent, Treasuries maturing in more than 15 years gained 4.2 percent, the biggest return for the month since 2011.

While it’s unclear how much lower Draghi can push these bond yields, his efforts to stave off recession in Europe have helped hand U.S. fixed-income investors billions of dollars in unexpected profits.

To contact the reporter on this story: Lisa Abramowicz in New York at

To contact the editors responsible for this story: Shannon D. Harrington at Caroline Salas Gage, Mitchell Martin

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