Long bonds gain as investors grab for higher yields

U.S. government debt prices gained on Tuesday with 30-year bonds leading the rally, as investors bet that the European Central Bank will launch new quantitative easing this week, keeping longer-dated debt in demand as investors hunt for higher yields.

The ECB meeting on Thursday is this week's main focus, when many expect the central bank will announce purchases of government bonds in a bid to fight off deflation and kickstart growth.

"If you are looking for ECB to not disappoint on Thursday, the predominant view is that you still won't have enough long-dated assets, and I think that is driving the flattener today," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

US 10-YR
US 30-YR

The yield curve between five-year notes and 30-year bonds flattened to 113 basis points, after steepening to 121 basis points on Friday. Record low yields on German and other European sovereign debt have contributed to demand for U.S. Treasuries, which pay far higher yields, even as the Federal Reserve is expected to increase interest rates this year as the U.S. economy improves.

Short- and intermediate-dated Treasurys are the most sensitive to interest rate hikes and have come under the most pressure from expected rate increases. Two-year notes yielded 0.47 percent on Tuesday, just above their lowest levels since October.

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Benchmark 10-year Treasury notes were yielding 1.76 percent, just above their lowest levels since May 2013. Thirty-year bonds yielded 2.38 percent on Tuesday, after falling to record lows of 2.35 percent last week.

The outlook for weak global economic growth also added a bid for bonds on Tuesday. The International Monetary Fund lowered its forecast for global economic growth in 2015, and called on Tuesday for governments and central banks to pursue accommodative monetary policies and structural reforms to support growth.

China's economy grew at its slowest pace in 24 years in 2014 as property prices cooled and companies and local governments struggled under heavy debt burdens, though many investors were relived growth wasn't as bad as they had feared.