Global Bond Yields Approach Record Low of 1.29% as Euro Plunges

By Wes Goodman

A gauge of global bond yields approached the all-time low of 1.29 percent 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 percent on Jan. 2. The low was set in 2013 based on data going back to 1996. Yields in Australia and Japan fell to records. Bonds are rallying, pushing borrowing costs lower, and the euro is sliding on speculation 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 U.S. 10-year yield was little changed at 2.10 percent at 6:52 a.m. in London, according to Bloomberg Bond Trader data. The price of the
2.25 percent note maturing in November 2024 was 101 10/32.
The Bank of America sovereign debt index returned 8.3 percent last year, the best performance since the global financial crisis of 2008.
Australian 15-year yields fell to an unprecedented 2.97 percent and Japan’s five-year yield dropped to 0.025 percent.

ECB Ready

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 programs that put downward pressure on borrowing costs and pump currency into the economy.
The Bank of Japan increased its QE program last year, while the Federal Reserve stopped buying U.S. 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 $1.1864, its weakest level since March 2006.
Jeffrey Gundlach, whose DoubleLine Total Return Bond Fund beat more than 90 percent of its peers over the past three years, told Barron’s the rally in Treasuries has further to go.
Gundlach got it right in 2014 by predicting bond market gains when the median forecast among economists surveyed by Bloomberg projected a selloff.

Record Low

U.S. 10-year yields may test the record low of 1.38 percent set in 2012, Gundlach said, according to a Jan. 3 article on Barron’s website. After crude oil prices tumbled 46 percent in 2014, Gundlach 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 (DBLTX) has gained 5.3 percent on average during the past three years, beating 92 percent of competitors, data compiled by Bloomberg show.
Economists predict the U.S. 10-year yield will rise to 3.06 percent by 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 U.S. aside and focus on Europe, Japan, China,” Chen said. “They’re not doing very well. I’m long” on Treasuries, he said, referring to a bet the securities will gain.
Chen said he’ll consider selling if U.S. 10-year borrowing costs fall to 2 percent. Yields lower than that make Treasuries too expensive, he said.