Forty-five percent of all government bonds yield less than 1 percent, Bank of America Corp. said, as central bankers in Japan, Europe and the U.K. decide on how to support their economies.
Speculation that the European Central Bank will start buying debt in the year ahead pushed the yield spread between U.S. 10-year Treasurys and German bunds towards a 15-year high and German 10-year yields to a record low of 0.866 percent last week. The rally helped drive demand for Treasurys and other notes as investors sought higher interest payments than they can get across Europe.
“The bond market is in a fix now,” said John Anderson, a portfolio manager at Smith & Williamson Investment Management. “If U.S. growth does pick up, current low yields will look unsustainable. But eurozone deflation could mean any correction could be a long way off. We stay long Treasurys and the dollar for the time being.” A long position is a bet that an asset price will rise.
The U.S. 10-year yield, a benchmark for borrowing costs around the world, rose 2 basis points, or 0.02 percentage point, to 2.42 percent as of 7:51 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.375 percent note maturing in August 2024 fell 6/32, or $1.88 per $1,000 face value, to 99 20/32. Treasurys maturing from one month to three years all yielded less than 1 percent.
The yield spread between Treasurys and German bonds was at 1.46 percentage points Thursday, within three basis points of 1.49 percentage points reached on Sept. 2, the highest since June 1999.
The ECB unexpectedly cut interest rates at Thursday’s decision to spur economic growth and stave off the threat of deflation.
The ECB’s 24-member Governing Council meeting in Frankfurt reduced all three of its main interest rates by 10 basis points. The benchmark rate is now 0.05 percent and the deposit rate is now minus 0.2 percent. A reduction in the benchmark rate was predicted by just 6 of 57 economists in a Bloomberg News survey. Draghi will speak to reporters at 2:30 p.m. in Frankfurt to explain the decision.
The Bank of Japan finished its meeting by maintaining its record debt purchases of 60 trillion yen ($572.4 billion) to 70 trillion yen a year.
Japan’s 10-year yield was little changed at 0.53 percent. Australia’s was little changed at 3.43 percent.
For Pacific Investment Management Co., which runs the world’s biggest bond fund, growth is weak enough that the next round of interest-rate increases will be less than usual.
“No one’s talking about rate hikes in Europe for several years,” Richard Clarida, an official at Pimco, said on Bloomberg Television’s “Street Smart” program in New York.
“Japan is still in an easing cycle. Globally, while the Fed and the Bank of England may start to move in 2015, it’s not going to be your father’s or your uncle’s rate-hike cycle.”
Futures contracts indicate traders are betting the Federal Reserve will raise interest rates in the U.S. next year. Policy makers have kept their target for federal funds, the rate banks charge each other on overnight loans, at zero to 0.25 percent since 2008. The policy has capped bond yields and helped send the Standard & Poor’s 500 Index to a record high Wednesday.
Bill Gross, who manages the $221.6 billion Pimco Total Return Fund, used his monthly outlook piece to reiterate his view that the Fed will limit how far it increases borrowing costs.
“Today’s levels of interest rates and stock prices offer a historically unacceptable level of risk relative to return unless the policy rate is kept low -– now and in the future,” Gross wrote. “That is the basis for the New Neutral, Pimco’s assumption that the Fed funds rate peaks at 2 percent or less in 2017.”
In the three cycles of rate increases that have occurred over the past 20 years, policy makers pushed the fed funds rate above 5 percent each time.
Bank of America analysts led by Michael Hartnett in New York wrote in their report dated Sept. 2 that investors should be “short bonds” with positions that will benefit from market declines. Money managers should expect “higher” U.S. growth and yields, the report said.
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