Global Bonds Jump on ECB-Linked Scarcity Before Greece Votes

Government bonds rallied around the world as investors bought sovereign debt on speculation the European Central Bank’s quantitative easing will shrink the pool of high-quality assets already limited by years of purchases from other central banks.

U.S. debt was supported as investors sought refuge as polls show an anti-austerity party will win Greek elections after a vote this weekend. Benchmark 10-year yields, which offer 0.87 percentage point more than other Group of Seven nations, dropped for a fourth straight week. Germany’s 10-year yields reached a record-low 0.345 percent Friday, and the nation’s five-year yield dropped below zero.

“The lack of supply given what the ECB is going to be doing on a monthly basis will be driving euro-rates to zero or negative rates,” said Thomas di Galoma, head of fixed-income rates at ED&F Man Capital Markets in New York. “It’s going to be tough for U.S. rates to rise, given the fact that rates in Europe are so low.”

The U.S. 10-year yield fell seven basis points, or 0.07 percentage point, to 1.80 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The 2.25 percent note due in November 2024 rose 19/32, or $5.94 per $1,000 face amount, to 104 1/32. The yield dropped four basis points since Jan. 16 and has declined every week this month.

Market Prices

Thirty-year bond yields were down seven basis points to 2.37 percent and touched a record low of 2.35 percent on Jan. 21.

“Relative to peers, there’s still value in the U.S. Treasury market,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. There’s “the view of inflation pressures being pushed out.”

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 in its quarterly global outlook released 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.

The difference between yields on two-year notes and 30-year bonds was 188 basis points. It touched 185 basis points on Jan. 21, the lowest in six years.

Bond Returns

Treasuries have returned 1.7 percent this month, after gains of 6.2 percent in 2014, according to Bloomberg U.S. Treasury Bond Index.

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.

Greek voters will decide whether Europe’s most-indebted country sticks to an austerity program that ensures its financial lifeline from creditors such as Germany. The opposition Syriza group, which has vowed to abandon the budget constraints that underpin the support while keeping Greece in the currency union, is projected by polls to gain about 32 percent of the vote compared with about 27 percent for the ruling New Democracy party.

Italy’s 10-year yield fell two basis points to 1.52 percent and touched 1.413 percent, the lowest level since Bloomberg began collecting the data in 1993. Japan’s 10-year yield dropped nine basis points to 0.23 percent, unwinding its surge on Thursday.

Yield Appeal

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

The ECB will buy government bonds as part of an asset-purchase program worth about 1.1 trillion euros ($1.24 trillion), or 60 billion euros a month, President Mario Draghi announced Thursday in Frankfurt, sparking a jump in European bonds.

Canada and Denmark both cut interest rates this week. 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 ($678 billion).

The Federal Reserve is forecast to leave interest rates unchanged when policy makers meet next week. 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.

Fed Policy

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 fed funds rate at virtually zero since 2008 to support an economic recovery.

Demand for U.S. assets pushed the Bloomberg Dollar Spot Index to its highest level since the gauge’s inception on Dec. 31, 2004.

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. Sales of the maturity peaked at $44 billion from October 2009 through April 2010.

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