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Global bonds extend record rally as Swiss scrap currency cap

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

The effective yield on the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index dropped to 1.15 per cent yesterday, 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.

"Global fixed income is probably going to remain well supported," said Michael Turner, a debt and currency strategist at Royal Bank of Canada in Sydney. Switzerland's decision to cut interest rates is the latest sign that central banks will keep borrowing costs low in 2015 to protect their economies, he said.

The benchmark US 10-year yield was little changed at 1.73 per cent at 10:10 am in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2024 was 104 22/32.

The yield dropped as much as 15 basis points yesterday to 1.70 per cent, the least since May 2013. Thirty-year yields declined to a record 2.35 per cent.

Australia's benchmark slid as low as 2.49 per cent, falling below the central bank's 2.5 per cent cash rate for the first time since 2012. Japan's 10-year yield fell as much as 2.5 basis points to a record 0.225 percent.

The franc rallied to a record against the euro 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.

A US report today will show consumer prices in the world's biggest economy fell 0.4 per cent in December from the previous month, according to a Bloomberg News survey. Prices excluding food and energy increased 0.1 per cent, a separate survey showed.

BLOOMBERG