Bonds Surge From U.S. to Germany on Outlook for Record-Low Rates

Bonds are rallying from the U.S. to Germany to Australia amid speculation the Federal Reserve will disappoint investors looking for signals it’s moving closer to raising interest rates from a record low.

Treasury 10-year yields rose today from almost the lowest level since May. German benchmark rates dropped to a record yesterday amid bets the European Central Bank will resort to buying bonds to spur growth. Unrest in Ukraine and Gaza is fueling the rally by boosting demand for the relative safety of government debt.Ten-year yields were at or near 2014’s lowest levels in 21 of 25 developed markets tracked by Bloomberg.

“The Fed is likely to be a bit of a damp squib,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets in Edinburgh. “Treasuries in general have been more affected by the geopolitical environment, particularly at the longer end.”

Treasury 10-year yields added two basis points, or 0.02 percentage point, to 2.48 percent as of 7:31 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due May 2024 was 100 6/32. The yield fell three basis points, or 0.03 percentage point, yesterday after sliding to 2.40 percent on May 29, the least since June 2013.

Australia’s 10-year yield dropped five basis points to 3.42 percent, and Japan’s was little changed at 0.53 percent.

Record Low

German 10-year bund yields fell as low as 1.109 percent yesterday, dropping below the previous record set in 2012 when the region was in the throes of a downturn that threatened the euro’s existence. It’s little changed today at 1.12 percent.

The Bloomberg Global Developed Sovereign Bond Index has gained 4.8 percent this year through yesterday, recouping a decline from 2013.

“The potential implications for global growth seemed to have underpinned Treasuries and global fixed income,” said Su Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “It’s hard to see an end to some of these geopolitical risks.”

The Fed will keep its target for overnight bank lending in a range of zero to 0.25 percent at the end of its two-day meeting today, based on a Bloomberg News survey of economists.

U.S. policy makers are scaling back the bond-buying program they have used to support the economy, and will reduce monthly purchases to $25 billion from $35 billion this week, based on responses from economists.

Dan Fuss, whose Boston-based Loomis Sayles Bond Fund outperformed 98 percent of its competitors during the past five years, said geopolitical risks will keep the Fed from raising interest rates for at least a year.

“There’s reason to worry geopolitically,” Fuss said this week on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays in New York. “I think our central bank takes that into account.”

Rate Outlook

Traders see almost an 80 percent probability the Fed will raise the target for its benchmark to at least 0.5 percent by September 2015, based on futures contracts.

A government report today will show the U.S. economy expanded at a 3 percent annual rate in the second quarter, based on a Bloomberg survey, after shrinking 2.9 percent during the first three months of the year.

The U.S. is scheduled to sell $15 billion of two-year floating-rate notes and $29 billion of seven-year fixed-rate securities today. The government auctioned five-year notes yesterday and two-year debt the day before.

Sanctions Extended

The European Union curbed Russia’s access to bank financing and advanced technology in its widest-ranging sanctions yet over President Vladimir Putin’s backing of the rebels in Ukraine.

Hamas’s military chief ruled out a truce in Gaza until the Islamist group’s demands for an end to the economic embargo of the territory are met, as the Israeli army stepped up its bombardment.

The ECB and Bank of Japan are also keeping borrowing costs at record lows to help spur growth in their economies. ECB President Mario Draghi in June unveiled an unprecedented round of stimulus measures that included cutting a key rate to negative and he has signaled that policy makers are willing to act again.

Treasuries returned 3.6 percent this year, underperforming European government securities, which gained 8.5 percent, according to Bloomberg World Bond Indexes. Japanese bonds earned 1.8 percent.

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