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Global bonds extend record rally as Swiss scrap currency cap

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Bonds around the world extended their record-setting rally this year as Switzerland's unexpected decision to abandon its currency cap and make interest rates even more negative drove demand for the safest assets.

[SINGAPORE] Bonds around the world extended their record-setting rally this year as Switzerland's unexpected decision to abandon its currency cap and make interest rates even more negative drove demand for the safest assets.

Treasuries headed for a third weekly gain a a report showed consumer-price inflation eased in December by the most in six years. The effective yield on the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index dropped to 1.1465 per cent on Thursday, a record low in data starting in 1996. Bonds in the gauge have returned 1.6 per cent on average this year, versus a 3.1 per cent loss for the Standard & Poor's 500 Index including reinvested dividends.

"The markets are still assessing what the SNB's move would mean to bonds," said Orlando Green, a fixed-income strategist at Credit Agricole SA's corporate and investment banking unit in London.

"Yields have been falling due to concern about disinflation and the US CPI data on Friday might add to that theme." The benchmark US 10-year note yield was little changed at 1.72 per cent as of 8:32 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.25 per cent note due in November 2024 was 104 3/4. The yield, which has declined 23 basis points, or 0.23 percentage point, this week, touched 1.7005 per cent on Thursday, the lowest since May 2013.

Thirty-year yields added one basis point to 2.38 per cent after declining to a record 2.3529 per cent on Thursday.

The difference, or spread, between two- and 30-year yields narrowed to 194 basis points from 196 basis points on Jan 9 as investors reached for the higher returns of longer-dated maturities in the absence of inflationary pressure.

Franc Strengthens The franc rallied to a record against the euro on Thursday after the Swiss National Bank scrapped its policy of capping its currency. The central bank lowered a benchmark interest rate to minus 0.75 per cent from minus 0.25 per cent.

Benchmark interest rates are close to zero in the US, Japan and Europe.

Treasuries have returned 8.1 per cent during the 12 months through on Thursday, according to Bloomberg World Bond Indexes. German securities gained 11 per cent and Japan's earned 4.7 per cent.

ABN Amro Bank NV cut its forecast for Treasury 10-year yields to 2.7 per cent, from 3 per cent, analysts led by Nick Kounis, the bank's head of macro research in Amsterdam, wrote in a report on Friday.

The consumer price index dropped 0.4 per cent, the biggest decline since December 2008, after falling 0.3 per cent in November, a Labour Department report showed. The median forecast of 89 economists surveyed by Bloomberg called for a 0.4 per cent decline. Excluding volatile food and fuel, the so-called core measure was unchanged, failing to rise for only the second time since 2010.

BLOOMBERG