LONDON: US government bonds rallied in Europe on Thursday, outperforming German Bunds, after the Federal Reserve pledged to keep rates low for longer than expected and said it may buy more bonds to stimulate the economy.
Fed Chairman Ben Bernanke said the US central bank was likely to keep interest rates near zero until at least late 2014, some 18 months later than he suggested last year.
Benchmark 10-year T-note yields were seen moving lower in the short-term, but breaking this year's tight 1.85-2.1 percent range depended on developments in the Greek debt swap negotiations, which are key to avoiding a messy default.
Ten-year yields were last 2.6 basis points lower on the day at 1.9752 percent, narrowing their gap over Bunds to 4 bps, compared to 10 bps at the European settlement close.
"The (Fed meeting) was surprisingly dovish so it allowed yields to push lower," RIA Capital Markets bond strategist Nick Stamenkovic said.
"But the sentiment towards risk assets is still positive after some good economic data out of the US lately and if we get a deal in Greece I expect 10-year yields to stay near 2 percent."
Stocks rallied as well in Europe, with the FTSEurofirst 300 up 0.59 percent at 1,045.73, while yield spreads of euro zone's lower rated debt over German Bunds narrowed. T-note futures were up 17/64 at 131-01/32.
Technical momentum indicators also suggested recent ranges would hold in the near term.
"This is ... a more neutral backdrop within the indicator picture, with the MACD (moving average convergence divergence) moving either side of its zero line and momentum now turning higher again," UBS technical analyst Richard Adcock said.
"This tends to support the view that prices are maintaining a choppy sideways range at the moment and that further evidence is required to confirm the true directional risks."
BELLY WELL SUPPORTED
The Fed also took the historic step of adopting an explicit inflation target, though Bernanke took pains to stress that officials would be flexible about reining in price growth when unemployment was too high.
Despite that, the long-end of the curve was underperforming, with the US 30/10 year yield spread 6 bps wider on the day at 16 bps.
"It clearly leaves the belly of the curve well bid, but it brings to question the inflation outlook and this is why the long-end is underperforming," said Craig Collins, trader at Bank of Montreal.
Ultra-long paper usually suffers more than the rest of the curve during bouts of risk appetite.
The US Treasury Department will auction $29 billion of seven-year debt at 1800 GMT on Thursday. Traders expect the dovish outcome of the Fed meeting to fuel strong demand for the offering, the last of this week's $99 billion in coupon-bearing supply.
A five-year auction on Wednesday got solid bids, sending 5-year yields within a whisker of five-year lows of 0.762 percent set in September.
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