Dec. 31 (Bloomberg) -- For the first time since at least 1997, the bond market produced the highest returns of any financial asset, beating stocks, commodities and the dollar as Europe’s sovereign-debt crisis threatened the global economy.
Led by U.S. Treasuries, fixed-income securities worldwide returned 5.81 percent, including reinvested interest, this year through Dec. 29, Bank of America Merrill Lynch indexes show. The Dollar Index tracking the U.S. currency against six peers rose 1.6 percent, while the Standard & Poor’s GSCI Total Return Index of commodities fell 1.18 percent and the MSCI All Country World Index of shares tumbled 6.9 percent with dividends.
“The year was one of tremendous volatility, brought on by increasing global and political economic uncertainties, which drove investors massive flight to quality into bonds,” Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York, said in a telephone interview on Dec. 27. “There has been a general softening of expectations for growth and inflation worldwide, and bonds have thrived.”
The European Central Bank and the Reserve Bank of Australia led central banks that reduced interest rates as the International Monetary Fund cut its forecast for global economic growth to 4 percent for this year and next from prior estimates of 4.3 percent for 2011 and 4.5 percent for 2012.
In downgrading its assessment of the global economy, the IMF predicted in September “severe” repercussions if Europe failed to contain a debt crisis that led to bailouts of Greece, Ireland and Portugal, and threatened to engulf Italy and Spain.
“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super- advanced economies that will be immune to the crisis that we see not only unfolding, but escalating at a point where everybody would actually have to focus on what it can do,” Christine Lagarde, managing director of the IMF, said on Dec. 15.
Bank of America Merrill Lynch’s Global Broad Market Index, which tracks more than 19,000 securities with a market value of almost $42 trillion, posted its best year since gaining 8.92 percent in 2002.
The biggest beneficiary from the flight to safety was U.S. Treasuries, which gained 9.64 percent, the most since 2008 at the height of the financial crisis. Treasuries due in 10 years or more soared 28.7 percent, the most since gaining 30.7 percent in 1995, even as S&P lowered the nation’s AAA credit rating one level to AA+ on Aug. 5 Moody’s Investors Service and Fitch Ratings affirmed their top ratings.
“At this time last year if you asked people what the best performing security class would be, not too many people would have said Treasuries, but it’s turned out to be the biggest surprise of the year,” Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh, said in a telephone interview on Dec. 27.
U.K. bonds were the best performers among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, jumping 17 percent. They beat German debt, considered the euro area’s safest securities, by more than 7 percentage points, the most since 1998.
Government bonds globally returned 6.03 percent on average, according to Bank of America Merrill Lynch indexes.
Investment-grade corporate securities gained 5.02 percent, while high-yield, high-risk, or junk, bonds returned 3.04 percent. Speculative-grade debt is rated below Baa3 by Moody’s and less than BBB- at S&P.
The rally in Treasuries bolstered the greenback, with U.S. Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the euro, yen, pound, Swiss franc, Canada dollar and Swedish krona, rising 1.6 percent. That followed a gain of 1.3 percent in 2010, marking the first time it advanced two years in a row since 2000-2001.
Among the 16 most-widely traded currencies, the yen was the only one to appreciate against the dollar, strengthening 5.4 percent. The biggest loser was South Africa’s rand, which depreciated 18.1 percent, data compiled by Bloomberg show.
The euro weakened 3.3 percent against the dollar, and fell below 100 yen for the first time since 2001. The 17-nation euro was the worst performer among the 10 developed-nation exchange rates tracked Bloomberg Correlation-Weighted Currency Indexes, losing 2.1 percent. The dollar advanced 1.1 percent on that basis and the yen gained 5.5 percent.
“The story of the year in currency markets has been the euro-zone crisis, and it has permeated every other capital market,” Boris Schlossberg, director of research at the online currency trader GFT Forex in New York, said in a telephone interview on Dec. 29. “Geopolitical risk will make a push for more volatility in the new year as whether the European Union as we know it will survive is still a big question.”
Commodities, as measured by the S&P GSCI Total Return Index, fell after gaining 9.02 in 2010 and 13.5 percent in 2009.
Copper slumped 21 percent this year, its first decline since 2008, as Europe’s debt crisis escalated and demand in China slowed. Cotton plunged 37 percent, its biggest loss since 2004.
“The market has come to the realization that there are, indeed, a lot of problems in Europe, and they are not going away, which could have knock-on effects for global growth,” Jeffrey Sherman, a commodities investor who helps manage $19 billion for DoubleLine Capital LP in Los Angeles, said in a telephone interview on Dec. 29.
Crude oil recorded its third straight gain, adding 8.2 percent to $98.89 a barrel in New York. Gold completed its 11th consecutive increase, the longest winning streak in at least nine decades. Bullion was at $1,564.20 an ounce in New York.
Two companies fell out of the list of the 10 biggest in the world by market value in 2011 from a year ago. Berkshire Hathaway Inc. dropped from 10 to 13 and China Mobile Ltd. slipped to 11 from nine. They were replaced by International Business Machines Corp., which jumped to six from 15, and Google Inc., which climbed to ninth from 13. Exxon Mobil Corp. remained the world’s biggest company while Apple Inc. jumped over Petrochina Co. into second.
The MSCI All Country World Index of stocks retreated after rallying 10.4 percent in 2010 and 31.5 percent in 2009. The MSCI index is valued at 12.4 times reported profit, 24 percent below the average from the past five years, according to data compiled by Bloomberg.
The S&P 500 was little changed and the Dow Jones Industrial Average climbed 5.5 percent. Both the S&P 500 and the Dow were among the 10 best performers of the 91 national indexes tracked by Bloomberg.
“Without a doubt, 2011 was the year of the coupon clipper as yield became an increasingly important source of return for both the bond and stock market,” said James Sarni, senior managing partner at Los Angeles-based Payden & Rygel, which manages $50 billion, in a telephone interview on Dec. 29.
--With assistance from Michael Weiss in Princeton, New Jersey. Editor: Paul Cox, Kenneth Pringle
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