Global Bonds Rise as ECB Purchase Pledge Backs Low-Yield World

Global sovereign bonds rallied after the European Central Bank expanded its debt-buying program, shrinking the supply of securities and reinforcing policy rates at virtually zero.

Yields declined from Germany to Spain after ECB President Mario Draghi committed to buying up to $1.3 trillion of bonds, including government debt, to revive economic growth and ward off deflation. The Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of 1.16 percent as of yesterday, close to the record 1.14 percent reached Jan. 19, the lowest based on data starting in 1996.

“Diminished stocks of high-quality assets will put downward pressure on yields, particularly in an environment where there’s strong competition among central banks and institutional investors,” said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “We have to look forward to low yields among the developed economies for a period of time.”

German 10-year debt declined eight basis points, or 0.08 percentage point, to 0.45 percent, according to Bloomberg data. French 10-year note yields dropped nine basis points to 0.62 percent.

U.S. debt

U.S. 30-year yields fell two basis points to 2.44 percent at 5 p.m. in New York. The price of the 3 percent security due in November 2044 gained 1/2 or $5 per $1,000 face amount to 111 27/32. The yield dropped to a record low 2.35 percent yesterday.

Ten year note yields fell one basis point to 1.86 percent. They reached 1.70 percent on Jan. 16, the lowest level since May 2013.

Primary dealers increased holdings of U.S. government debt by $14.95 billion, the most since the week ending Nov. 12, according to Fed data. Total holdings rose to $29.5 billion in the week ending Jan. 14, climbing from $7.8 billion in the week ending Dec. 31, the least since September 2011.

The ECB will buy 60 billion euros ($68 billion) of private and public securities a month through September 2016. The central bank held the main refinancing rate at 0.05 percent, a decision predicted by all 48 economists in a Bloomberg News survey. The deposit rate remained at minus 0.2 percent and the marginal lending rate at 0.3 percent.

German two-year note yields touched a record low minus 0.182 percent as Draghi said the purchases will include securities due between two and 30 years, including those with negative yields.

Debt Levels

Italy’s 10-year yield fell to 1.556 percent, the lowest level since Bloomberg began collecting the data in 1993. Spanish 10-year yields declined to a record 1.397 percent.

“Every debt market looks like it’s bid,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Federal Reserve. “Buy the rumor, sell the fact was the trade and now we’re starting to prepare for quantitative easing and the 1 trillion euros.”

The average yield on euro-area government debt dropped to 0.7017 percent on Jan. 19, the least since at least 1995, according to Bank of America Merrill Lynch indexes.

The ECB’s purchase program equates to 14 percent of the domestic-bond market, Morgan Stanley, strategists including Anthony O’Brien wrote in a note to clients. Of the 60 billion euros in debt being purchased monthly, the ECB will buy about 44 billion euros in government bonds/agencies, they wrote.

Central Banks

Central banks intensified their battle against slowing inflation this week as a 50 percent plunge in the cost of oil over the past year threatens to curb consumer-price gains across the global economy.

The Danish central bank cut its certificate of deposit rate to minus 0.35 percent from minus 0.2 percent, according to statement. The Bank of Canada cut its main interest rate yesterday, and the Bank of Japan has expanded a lending program. Two Bank of England policy makers dropped calls for an interest-rate increase.

Treasuries have rallied this year as falling yields around the world made U.S. securities more attractive on a relative basis even as investors prepare for the Fed to increase borrowing costs later this year. Ten-year notes yield 90 basis points more than the comparable yields of other Group of Seven nations. That’s the highest since Jan. 2.

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

The U.S. announced it 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. Sales of the maturity peaked at $44 billion from October 2009 through April 2010.

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