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How will ECB action affect global bond markets?


Sovereign bonds rallied around the world on Friday as investors speculate that the European Central Bank’s quantitative easing program will shrink the pool of high-quality government assets already limited by years of purchases from other central banks. U.S. 10-year note yields fell five basis points, or 0.05 percentage point, to 1.82 percent in early trading, according to Bloomberg Bond Trader data.

While Germany’s 10-year yields reached a record-low 0.359 percent Friday, and the nation’s five-year yield dropped below zero. Ten-year Italian bond yields dropped below 1.5 percent for the first time. The fall in yields follows yesterdays announcement from ECB President Mario Draghi that the ECB will buy €60bn bonds each month from banks until the end of September 2016, or longer, in an attempt to ward off signs of deflation threatening to engulf the euro area.

U.S. bonds better value

In related news, yesterday’s ECB action may provide a welcome boost to U.S. corporate bonds as investors shift money across the Atlantic into U.S. corporate debt, which now offers the most yield relative to company debt in Europe in more than a decade. Investors holding U.S. junk bonds now get an extra 2.9 percentage points over those holding euro-denominated high yield notes, index data shows. “In our global high-yield portfolios, we have reduced exposure to Europe and moved to the U.S. for exactly that reason,” Ivan Rudolph-Shabinsky, a New York-based money manager at AllianceBernstein Holding LP, told Bloomberg. “I wouldn’t be surprised if more people say ‘I get better value in the U.S.’”

Boon for emerging market bonds

Emerging market debt may also get a boost from the ECB’s intervention as more European investors turn to overseas markets looking for attractive yield options. The two-year German bund has a yield of record low negative 0.2%, whereas the emerging market local-currency bonds have an average 6.1% yield. “It’s hard not to be bullish,” Viktor Szabo, who helps oversee $12 billion in emerging-market debt at Aberdeen in London, told Bloomberg. “It’s getting increasingly difficult for European investors to meet higher interest-rate demands and EM is there.”

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