US long-bond yields moved to their lowest level in 17 months in US trading yesterday morning, amid continued optimism that inflation is under wraps. Over the past four months, the yield on the 30-year bond - which is regarded as an effective proxy for US inflationary expectations - has declined more than 80 basis points from a high of 7.16 per cent on April 14. Yesterday, it sank three basis points to yield 6.33 per cent, the lowest level since since early March 1996. Analysts say the drop has been driven by the restrained inflation picture in the United States, coupled with a healthy - but not excessive - pace of economic growth. More declines were expected, they said. Lower bond yields strengthen the case for investing in equities and the Treasuries' performance has contributed to the Hang Seng Index's current record-setting run. SocGen-Crosby Securities senior economist for North Asia, Clive McDonnell, said: '[Long-bond] yields are vital for Hong Kong. It drives valuations. We have to look at it because of the Hong Kong-US dollar link.' He said that with rising US productivity, muted inflation, a balanced-budget deal and solid economic growth, further falls in yields were probable. Christopher Wood, Asia and emerging markets strategist at Peregrine Brokerage, said the impact of lower yields had yet to be fully priced into the domestic equity market. '[US] inflation is dead in the water,' he said. 'The impact [of lower yields] is far from fully discounted.' He estimated that they could drop below 6 per cent by the end of this year or early next year, helping to send the blue-chip index towards 17,000 points. Banking and property stocks tend to benefit most from lower bond yields. The sectors account for just over half of the Hang Seng Index.