Outlook for record-low interest rates fuels rally in bonds

PUBLISHED : Thursday, 31 July, 2014, 1:24am
UPDATED : Tuesday, 05 August, 2014, 8:10pm

Bonds are rallying from the United States to Germany to Australia on speculation that the Federal Reserve will hold interest rates at a record low to support the world's biggest economy.

Ten-year yields were at or near 2014's lowest levels in 21 of 25 developed markets tracked by Bloomberg. German benchmark yields dropped to a record amid expectations from traders that the European Central Bank would resort to buying bonds as it tried to spur growth by reducing borrowing costs.

Unrest in Ukraine and Gaza is fuelling the rally by driving demand for the relative safety of government debt.

"The potential implications for global growth seemed to have underpinned Treasuries and global fixed income," said Su Lin Ong, the head of Australian economic and fixed-income strategy at Royal Bank of Canada. "It's hard to see an end to some of these geopolitical risks."

The implications for global growth seemed to have underpinned Treasuries

The US 10-year bond yield fell to 2.4 per cent on May 29, the least since June 2013, while German 10-year bund yields dropped to a record 1.109 per cent on Tuesday.

The Fed is expected to keep its target for overnight bank lending at zero to 0.25 per cent at the end of its two-day meeting, based on a survey of economists.

US policymakers are scaling back the bond-buying programme they have used to support the economy, and are expected to reduce monthly purchases to US$25 billion from US$35 billion this week, based on the response of the economists.

The ECB and the Bank of Japan are also holding borrowing costs at record lows to help maintain growth in their economies.

The last time German yields were at such levels was when the region was in the grip of a downturn that threatened the euro's existence.

The European Union curbed Russia's access to bank financing and advanced technology in its widest-ranging sanctions yet over President Vladimir Putin's backing of the rebels in Ukraine.

Hamas' military chief ruled out a truce in the Gaza Strip until the Islamist group's demands for an end to the economic embargo of the territory are met, as the Israeli army stepped up its bombardment.