Long bond prices gain, ECB meeting in focus

Thirty-year bonds (U.S.: US30Y) rallied on Wednesday and the yield curve flattened as investors anticipated Thursday's European Central Bank meeting, when the ECB is expected to announce purchases of government bonds to fight deflation and try to kickstart growth. The potential size of the program is seen at around 600 billion euros ($690 billion), according to a Reuters poll.. Uncertainty about details of the plan, however, and whether it will be viewed as likely to reverse the crippling economic slowdown in the region, has added a bid for safe-haven European and U.S. government bonds. ``There is uncertainty as far as what the ECB is going to do, if the ECB is going to do something that is perceived as effective,'' said Lou Brien, market strategist at DRW Trading in Chicago. Thirty-year bonds outperformed on Wednesday as ECB bond purchases were seen as likely to add to a lack of supply of high-quality debt. The yield curve between five-year notes and 30-year bonds flattened to 107 basis points, from 109 basis points on Tuesday. Investors have been reaching for longer-dated bonds to generate higher yields and Treasuries have been popular as they offer significantly higher yields than comparable German or Japanese debt. Benchmark 10-year U.S. notes rose 3/32 in price on Wednesday to yield 1.78 percent, which compares to yields of 0.49 percent for comparable German government debt. Bond yields have typically risen as central banks launch quantitative easing as investors anticipate the bond purchases will spur growth and increase inflation, but have fallen after the programs end. Improving U.S. economic growth has raised bets that the Federal Reserve is closer to raising interest rates in a move many expect to occur this year, but a lack of wage inflation has tempered yield increases. The dollar is expected to continue gaining against the euro, which may also make dollar-denominated assets such as U.S. government debt attractive.