Central Bank Buying Bolsters Bond Prices

By MIN ZENG The moment still belongs to the bulls in government bond markets, for the short term. They have on their side the central banks, whose actions to combat recession and keep deflation at bay support the bond market. One of the quantitative-easing measures used by central bankers, buying government bonds, helps lift prices and push down yields, tipping the market in favor of bulls over bears. "Between now and going into the second quarter, you are likely to see low yields everywhere," said Cyril Beuzit, head of BNP Paribas's global interest-rate strategy in London. Thus far, the central banks' actions have had some success. Earlier this month, the 10-year U.K. government-bond yield hit a low because of the Bank of England's £75 billion ($108.88 billion) bond-purchase program. In the U.S., the 10-year Treasury yield posted the biggest one-day decline in more than two decades last week on the Federal Reserve's announcement it will buy as much as $300 billion in government debt over the next six months. The Bank of Japan joined the buying camp last week, while speculation increased that the European Central Bank and the Bank of Canada would follow suit in coming months. Mr. Beuzit said he expects the 10-year Treasury yield to move closer to 2% in coming months. That means the 10-year note's yield may have a chance to retest the low of 2.034% set in mid-December. Late Friday afternoon in New York, the 10-year note was down 8/32 point, or $2.50 per $1,000 face value, to 101 3/32. Its yield rose to 2.626% from 2.597% late Thursday, as yields move inversely to prices. The 30-year bond was down 24/32 point to yield 3.655%. For sure, the buying programs face increases in bond supply this year, which tempers the decline in yields. This week, the U.S. government will sell $98 billion in notes, including $40 billion of two-year, $34 billion of five-year and $24 billion of seven-year notes. But strategists at Barclays Capital said economic uncertainty, concerns about banks and government-bond purchases should counter supply pressures over the next few months, keeping rates low. In a research note Friday, they said they expect further price gains in government bonds. Supply will become a bigger worry if the quantitative-easing measures work to revitalize economies and raise risks of inflation in the longer term, market participants said. Niels From, chief interest-rate strategist at Nordea Bank in Copenhagen, said the Fed's commitment to buy government bonds may encourage investors to bid on auctions. That would allow the U.S. to continue to seek funding. "The Fed is out there," Mr. From said. "The market knows that if the Fed isn't satisfied with the impact, they may simply expand the program." The Fed said Wednesday that it plans to hold the first purchase late this week, and the buying would include both nominal bonds and Treasury inflation-protected securities. The purchases will concentrate on maturities ranging from two years to 10 years. Still, given that the yields on short-dated securities are anchored by a low interest-rate environment, market participants expect long-dated government bonds to outperform, meaning their yields have more room to fall than at the short end of the curve. Among the government-debt markets, euro-zone bonds, such as German government debt, are likely to provide better value compared with their counterparts in the U.S., the U.K. and Japan. The ECB is the only major central bank that still has room to cut interest rates, and it is the only one that hasn't announced it will intervene in the government-bond markets. That means yields in the euro zone have bigger potential to fall among the four major markets, participants said. Write to Min Zeng at min.zeng@dowjones.com