By Min Zeng
Government bond yields on both sides of the Atlantic tumbled to
historic lows on Friday, the latest ripple from Thursday's decision
by the European Central Bank to support economic growth with a
monetary stimulus plan.
The 10-year yields in Germany, France, Belgium, Finland,
Austria, the Netherlands, Spain, Italy, Ireland and Portugal all
fell to record lows, extending the declines of the past months.
In the U.S., the yield on the benchmark 10-year note fell toward
a 20-month low. The yield on the 30-year Treasury bond settled at a
record low. Bond yields fall when their prices rise.
Investors have been piling into both stocks and government bonds
following ECB President Mario Draghi's announcement on Thursday
that the central bank will buy a total of EUR60 billion ($67
billion) a month in assets, including government bonds. The ECB
said the buying will start in March and run through September
2016.
Bond buyers believe the buying binge by the ECB will boost asset
prices at a time when demand for bonds, especially high-grade
government bonds, remains strong due to the uncertain global growth
outlook.
"In today's $100 trillion global supermarket of bonds, the
shelves will be further emptied by the ECB's bond-buying program,
supporting bond prices," said Tony Crescenzi, senior market
strategist at Pacific Investment Management Co. in Newport Beach,
Calif., which had $1.68 trillion in assets under management at the
end of 2014.
Lower yields on government bonds could be a boon for the housing
market as they push down mortgage rates. Companies also benefit by
locking in favorable borrowing costs when selling new debt.
But lower yields mean investors have to make do with lower
income, pushing many to dial in to riskier bonds for higher yields.
Investors also caution that bond buyers may be vulnerable if
sentiment sours on bonds, as slim yields offer a thin layer of
protection against the risk of capital losses.
In late afternoon trading, the yield on the benchmark 10-year
Treasury note was 1.814%, compared with 1.898% on Thursday. The
yield had closed at 1.777% on Jan. 15, the lowest level since May
2013. The yield was 2.173% at the end of 2014.
The yield on the 30-year Treasury bond closed at 2.391%,
breaking below the previous record of 2.399% on Tuesday.
The ECB joins the ranks of the Federal Reserve and other major
central banks in tapping the unconventional monetary-policy tool,
known as quantitative easing, following the 2008 financial
crisis.
The yield on the 10-year German government bond fell Friday to
0.316%, according to Tradeweb. The yield on France's 10-year bond
fell to 0.533%. The yield on Spain's 10-year bond declined to
1.378% and the yield on Italy's 10-year bond dropped to 1.538%.
Jim Caron, global fixed-income portfolio manager at Morgan
Stanley Investment Management, with $398 billion in assets under
management, said he expects the ECB to gobble up all the net
issuance of eurozone government bonds over the next 12 months.
"This should prove to be supportive for euro bonds ultimately,"
said Mr. Caron. "As for Treasury bonds, they will follow price
action in Europe."
Lower bond yields in Europe and Japan have turned U.S. Treasury
bonds into an attractive bargain, dragging down U.S. bond yields
even as the U.S. economy has strengthened and the Fed is prepared
to raise interest rates in the middle of this year for the first
time since 2006. The Fed's next policy meeting is due on Jan
27-28.
A stronger dollar has enabled foreign investors to pick up extra
returns on U.S. bonds and stocks. The dollar rallied Friday to the
strongest level against the euro in more than a decade.
Some investors are seeking higher yields in riskier markets.
Mark Dowding, senior fixed-income manager at BlueBay Asset
Management in London, which oversees $67 billion, said he has
allocated more cash into government bonds sold by relatively small
economies in Europe, such as Latvia, Lithuania, Slovakia and
Slovenia.
Mr. Dowding has also been buying euro-denominated government
bonds sold by such countries as Mexico, Brazil, Turkey and
Indonesia.
"At some point we believe everyone is too pessimistic on growth
and yields will start to rise, but this is more likely later in
2015," said Mr. Dowding.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
5/8% 2-year 100 8/32 up 1/32 0.499% -2.4BP
7/8% 3-year 100 1/32 up 4/32 0.859% -4.0BP
1 5/8% 5-year 101 14/32 up 9/32 1.323% -5.7BP
2 1/8% 7-year 103 9/32 up 15/32 1.620% -7.0BP
2 1/4% 10-year 103 29/32 up 24/32 1.814% -8.3BP
3% 30-year 112 29/32 up 1 25/32 2.391% -7.8BP
2-10-Yr Yield Spread: +131.5BPS +137.4BPS
Source: Tradeweb/WSJ Market Data Group
-- Write to Min Zeng at min.zeng@wsj.com
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