Bond bears miss out on $2tr windfall in record debt rally

Recession worries and central-bank stimulus in Europe and Japan have given fresh life to a threedecade-long rally in global debt. Bonds worldwide are off to the best annual start since at least 1996. They've earned about 3.2 percent this quarter and added $2.1 trillion of market value, according to a Bank of America Merrill Lynch index that tracks securities ranging from corporate and government obligations to mortgage-backed debt.

The strength came as a surprise to bears who said the rally was on its last legs after the Federal Reserve raised interest rates for the first time in nearly a decade in December. At the start of the year, strategists predicted benchmark 10-year Treasury yields would reach 2.45 percent this quarter. Instead, 10year notes yielded 1.81 percent as of 8:45 a.m. in London on Thursday, dropping from 2.27 percent on Dec. 31. Bond prices move in the opposite direction of their yields.

"The lower yields have gotten, the more reasons have piled up that yields have to stay low," said Robert Tipp, chief investment strategist in Newark, New Jersey, for Prudential Financial Inc.'s fixedincome division, which manages $575 billion. He expects the 10-year Treasury yield will end the year at 1.9 percent.

Government debt, the first destination for investors seeking safety, led the gains with a total return of 3.7 percent though March 29. Signs of slowing global economies and turbulence in stocks and currencies helped drive the demand. After their March policy-setting meeting, Fed officials said global economic developments posed a risk to growth, and cut their projected pace of 2016 rate increases to two, from the four they forecast in December.

The Citigroup Surprise Index for the Group of 10 economies, a gauge of how data measure up to economists' forecasts, fell to its lowest since 2013 in February as oil prices plummeted and stocks entered a bear market. It was just the second time in seven years the MSCI All-Country World Index of shares experienced such a slide.

Other central banks stepped up efforts to stave off deflation. The European Central Bank cut rates further below zero in March, and the Bank of Japan announced negative rates in January. As a result, investors buying some debt in those economies are in essence paying to lend. Even so, demand for sovereign securities has been so great that more than $8 trillion of debt in the Bank of America global index trades with yields below zero. "The ECB and BOJ are buying a boatload of debt," said Jack McIntyre, a money manager in Philadelphia at Brandywine Global Investment Management LLC , which oversees $69 billion.