May 28, 2014 / 4:05 PM / in 4 years

GLOBAL MARKETS-U.S., euro zone bonds rally on expected ECB easing

* Bond yields rally on ECB expectations
    * U.S. yields below 2.50 percent
    * Gold steadies at 3-1/2-month low as safe-haven appeal dims
    * World equity markets subdued

    By David Gaffen
    NEW YORK, May 28 (Reuters) - U.S. and European bond markets
rallied and benchmark yields fell to multi-month lows on
Wednesday in expectations of stimulus from the European Central
Bank next week and on month-end buying from U.S. funds. 
    Stock markets were largely flat. Wall Street dipped slightly
after the benchmark S&P 500 set a closing record on
Tuesday. The MSCI World Index was up
fractionally to 420.27 points, less than 2 percent from its
lifetime high. 
    European markets digested new credit and bank lending
figures from the European Central Bank that bolstered the case
for interest rate cuts next week.
    The yield on the U.S. 10-year note fell to a 10-month low at
2.447 percent, as the bond rose 19/32 in price, while the yield
on the 30-year bond hit an 11-month low. Investors have been
buying long-dated debt in tandem with declines in European
yields and as reduced Federal Reserve purchases of bonds are
expected to increase the duration in indexes followed by many
bond fund managers. 
    "The month-end extensions are part of the rally, and the
word is it's larger than usual," said Jeffrey Young, interest
rate strategist at Nomura Securities in New York.
    German two-year bond yields, the most sensitive to ECB
interest rate moves, hovered at a 6-1/2-month low and Spain's
hit record lows. The DAX stock index did a little
better than Europe's other main markets, adding a few
more points to Tuesday's record high. 
    The ECB's lending data showed credit to companies fell 1.8
percent on an annual basis in April. The decline was less than
the prior month, but was still evidence of sluggish lending in
the euro zone. 
    The data reinforce the case for a reduction in the ECB's
base rate, already at a record-low 0.25 percent, said Jan von
Gerich, chief developed markets strategist for Nordea in
Helsinki, but markets may need bolder action to rise further.   
    The Dow Jones industrial average fell 16.83 points,
or 0.1 percent, to 16,658.67; the S&P 500 gained 1.07
points, or 0.06 percent, to 1,912.98; and the Nasdaq Composite
 dropped 0.68 points, or 0.02 percent, to 4,236.39.
    The dollar shrugged off the slide in U.S. Treasury yields to
below 2.50 percent. The dollar held near an eight-week high
against a basket of major currencies and fetched 101.76 
against the yen, within striking distance of the two-week high
of 102.145 seen on Tuesday. The euro fell to $1.3598 against the
    Brent crude was modestly lower, falling 38 cents to
$109.64 a barrel. 
    Gold extended overnight losses to a 3 1/2-month low.
 Spot gold slipped to $1,257.20 an ounce.

 (Editing by Leslie Adler)

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