Global bond yields reaching record low of 1.29% as euro plunges

Singapore

A GAUGE of global bond yields approached the all-time low of 1.29 per cent as investors sought the safety of debt while the euro tumbled.

Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of 1.30 per cent on Jan 2. The low was set in 2013 based on data going back to 1996.

Yields in Australia and Japan fell to record lows. Bonds are rallying, pushing borrowing costs lower, and the euro is sliding on speculation that the European Central Bank is about to start buying government debt to stave off deflation.

"The ECB is trying to move in to quantitative easing, and that's helping the bond market globally," said Hiroki Shimazu, the senior market economist in Tokyo at SMBC Nikko Securities Inc, a unit of Japan's second-largest publicly traded bank.

The benchmark US 10-year yield was little changed at 2.10 per cent at 6.52am in London on Monday, according to Bloomberg Bond Trader data. The price of the 2.25 per cent note maturing in Nov 2024 was 101 10/32.

The Bank of America sovereign debt index returned 8.3 per cent last year, the best performance since the global financial crisis of 2008.

Australian 15-year yields fell to an unprecedented 2.97 per cent and Japan's five-year yield dropped to 0.025 per cent.

ECB president Mario Draghi said in an interview with German newspaper Handelsblatt published last week that while deflation risks are "limited", policy makers "have to act against such risk". Quantitative easing is the term for central bank bond-buying programmes that put downward pressure on borrowing costs and pump currency into the economy.

The Bank of Japan increased its QE programme last year, while the Federal Reserve stopped buying US bonds.

Greece's political parties embarked on a campaign for elections in less than three weeks that Prime Minister Antonis Samaras said will determine the fate of the country's membership in the euro currency area.

The euro fell as low as US$1.1864, its weakest level since March 2006.

Jeffrey Gundlach, whose Double-Line Total Return Bond Fund beat more than 90 per cent of its peers over the past three years, told Barron's the rally in Treasuries has further to go.

Mr Gundlach got it right in 2014 by predicting bond market gains when the median forecast among economists surveyed by Bloomberg projected a selloff.

US 10-year yields may test the record low of 1.38 per cent set in 2012, Mr Gundlach said, according to a Jan 3 article on Barron's website. After crude oil prices tumbled 46 per cent in 2014, he sees deflationary forces at work globally that are sending long-bond yields lower, according to the article. Disinflation means a slowing of inflation.

The DoubleLine Total Return Bond Fund has gained 5.3 per cent on average during the past three years, beating 92 per cent of competitors, data compiled by Bloomberg show.

Economists predict the US 10-year yield will rise to 3.06 per cent by the end of 2015, according to a Bloomberg News survey with the most recent forecasts given the heaviest weightings.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 1.72 percentage points. The average for the past decade is 2.18.

Slowing global economic growth is driving demand for debt, said Kevin Chen, a bond trader at Capital Securities Corp in Taipei. "Let's just put the US aside and focus on Europe, Japan, China," he said. "They're not doing very well. I'm long on Treasuries," he said, referring to a bet the securities will gain.

Mr Chen said he'll consider selling if US 10-year borrowing costs fall to 2 per cent. Yields lower than that make Treasuries too expensive, he said. BLOOMBERG