Treasuries are beating all other U.S. fixed-income securities for the first time in three quarters as investors around the world seek the safest assets.
U.S. government debt has gained 2.9 percent since March, while corporate bonds returned 1.9 percent, mortgages rose 1 percent and municipal bonds increased 1.8 percent, according to Bank of America Merrill Lynch index data. The combination of Europe’s debt crisis, China’s slowdown and record stimulus by the Federal Reserve means Treasuries are outperforming the global bond market by 1.3 percentage points, after lagging behind by 2.4 percentage points in the previous quarter.
The returns show that even after the Fed kept the economy growing for 11-straight quarters by buying $2.3 trillion of assets and continuing to swap $667 billion of short-term debt into longer-term securities, bond investors expect the economy will remain sluggish. The extra yield investors demand to own anything else besides Treasuries corresponds to an expansion of less than 1 percent, according to Barclays Plc index data compiled by ING Investment Management.
“With the weight of everything, there are not enough points of light and promise out there to get you to say ‘I’m going to go for that risk-based asset,’” Mitchell Stapley, chief fixed-income officer at Grand Rapids, Michigan-based Fifth Third Asset Management, which oversees $15 billion in assets, said in a June 22 telephone interview. “You’re going to sleep less badly by buying a U.S. Treasury security.”
Yields on benchmark 10-year notes fell to a record low of 1.44 percent on June 1, after the economy added fewer jobs in May than analysts forecast, suggesting the European sovereign- debt crisis is restraining U.S. growth.
The 1.75 percent security due in May 2022 fell 28/32, or $8.75 per $1,000 face value, to 100 21/32 last week, according to Bloomberg Bond Trader prices. The yield rose 10 basis points, or 0.1 percentage point, to 1.68 percent. A year earlier, the yield on the benchmark security for everything from consumer loans to corporate borrowing was 2.98 percent.
The yield dropped six basis points to 1.61 percent as of 8:55 a.m. New York time.
Treasuries gained 0.87 percent this quarter through June 21 on a risk-adjusted basis, which takes into account volatility, while securities from government bonds to mortgages globally have returned 0.28 percent, according to Bank of America Merrill Lynch index data.
There is a “major shortage of safe assets in the global financial system,” according to a report yesterday from the Bank for International Settlements in Basel, Switzerland.
Debt from companies and municipalities to securities created by packaging mortgages and other assets gained less, in part because the $10.5 trillion Treasury market is the most liquid pool of securities in the world, so prices respond to new information the fastest. Primary dealers traded $504 billion of U.S. government debt the week that ended June 13, according to Fed data. That compares with $93 billion of corporate bonds during the same period.
Average yields in the $5.13 trillion U.S. corporate bond market declined to 4.28 percent as of June 22 from 4.81 percent at the end of last year, according to Bank of America Merrill Lynch index data. They’ve fallen to 1.9 percent from 1.98 percent in the $5 trillion mortgage market.
The bank’s index of $902 billion of state and local government debt showed yields declined to 3.38 percent from 3.6 percent. The $377 billion index of asset-backed securities has returned 0.66 percent this quarter as yields dropped to an average of 1.3 percent from 1.58 percent at the end of 2011.
Mortgage securities yield about 80 basis points more than benchmark Treasuries, compared with an average of about 75 basis points when the U.S. economy grows at a rate of about zero to 1 percent, according to ING Investment Management. Investment- grade corporate bond spreads are about 31 basis points wider than the average for that level of expansion.
Five years after bonds tied to subprime mortgages started to collapse, triggering the worst financial crisis since the Great Depression, many investors said they are still more concerned about getting their capital back than about the return on the investment.
“We are in a world where we have a scarcity of true safe- haven assets,” Wan-Chong Kung, a bond-fund manager in Minneapolis at Nuveen Asset Management, which oversees more than $100 billion, said in a June 20 telephone interview. “As long as people still feel like they need some safety in their portfolio, and need to find some shelter, Treasuries will continue to find a bid.”
The U.S. is one of only six major economies with credit- default swaps on their debt trading at less than 100 basis points, meaning they are viewed as almost risk free. A year ago, eight Group of 10 nations fit that category, data compiled by Bloomberg show.
Even if U.S. growth accelerates, yields on the 10-year note are only forecast to increase to 2.16 percent by the end of the year, according to the median estimate of 63 economists surveyed by Bloomberg. Yields averaged 4.35 percent in the five years before the financial crisis began in June 2007, and about 6.7 percent over the past 50 years.
“There’s not going to be a serious backup,” or much higher rates, said Rob Robis, head of fixed-income macro strategies in Atlanta at ING Groep NV’s ING Investment Management, which oversees about $160 billion. “Treasury yields, while quite boring, will be well-contained.”
Swiss and Danish government bond yields traded at less than zero percent this month as European leaders debate a more integrated fiscal and banking union. Greece is seeking to renegotiate the country’s second bailout to ensure there are no further wage and pension cuts in the next two years and to protect jobs in the civil sector. Spain’s banks would need as much as 62 billion euros ($77.5 billion) in capital to withstand a worst-case economic scenario, according to two consulting firms hired by the government.
“People are terrified,” Stuart Thomson, a money manager in Glasgow at Ignis Asset Management, which oversees the equivalent of $109 billion, said in a June 22 interview. “The U.S. is the true safe haven at the moment.”
Fed officials led by Chairman Ben S. Bernanke last week expanded their program to replace $400 billion of short-term bonds with longer-term debt, known as Operation Twist, by $267 billion and lowered their estimate for 2012 growth to a range of 1.9 percent to 2.4 percent, from 2.4 percent to 2.9 percent in April.
The economy added 69,000 jobs in May, the fewest in a year, and unemployment unexpectedly climbed to 8.2 percent, the Labor Department reported June 1. The jobless rate has remained above 8 percent since January 2009, making it a critical issue as President Barack Obama seeks reelection in November.
Extending Twist “instills a bit of confidence that the Fed is here,” Andy Richman, who oversees $12 billion as a director of fixed-income in West Palm Beach, Florida for SunTrust Bank’s wealth and investment management division, said June 20 in a telephone interview. “The Fed is worried about employment. They want to do what they can to support the balance sheet of the consumer. They don’t need to do more at this point.”
The unprecedented amounts of money pumped into the financial system through bond purchases, known as quantitative easing, or QE, combined with interest rates near zero since December 2008 have resulted in historically low yields without inflation.
A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, which gauges average inflation between 2017 and 2022, dropped as low as 2.41 percent on June 18, down from a 2012 high of 2.78 percent on March 19. As recently as Aug. 1 the rate climbed to as high as 3.23 percent.
That means the cost to the Obama administration of financing a fourth-straight deficit exceeding $1 trillion is declining. The U.S. spent $272 billion on interest expense in fiscal 2012 through May, compared with $275.3 billion at the same point in fiscal 2011.
Companies are taking advantage of the lowest yields ever to refinance and extend maturities of outstanding debt. The lowest mortgage rates on record are also helping to stabilize the U.S. housing market.
Yields on U.S. investment-grade debt fell to 3.4 percent from 7.82 percent at the end of 2008, 4.89 percent a year later and a record low 3.33 percent May 8, according to Bank of America indexes.
Corporate-bond issuance has an average maturity of 10.6 years this year, compared with 10.1 percent in 2011, data compiled by Bloomberg show.
Target Corp. auctioned $1.5 billion of debt due in July 2042 in its first 30-year bond sale since 2008 on June 21, according to Bloomberg data. The securities were priced to yield 145 basis points more than similar-maturity Treasuries. The second-largest U.S. discount retailer sold $2.25 billion of 7 percent bonds maturing in 2038 four years ago at a spread of 270 basis points.
Falling mortgage-bond yields mean home-loan rates are also at record lows, with 30-year borrowing costs at 3.66 percent, down from last year’s high of 5.05 percent on Feb. 10, according to weekly surveys by finance company Freddie Mac.
Cheaper loans are helping the housing market recover. U.S. home prices rose in April for a third month, the Federal Housing Finance Agency reported June 21. Prices climbed 0.8 percent from March and 3 percent from a year earlier.
D.R. Horton Inc., the largest U.S. homebuilder by volume, issued $350 million of 4.75 percent notes due May 2017 on April 25. The securities, priced at a spread of 390 basis points, have rallied since the Fort Worth, Texas-based company’s sale to 346 basis points on June 21, according to Trace, the bond-price reporting system of the financial industry regulatory authority.
State and local governments have sold about $103 billion in bonds to refinance previously issued debt in 2012, the most for the period since at least 2007, according to data compiled by Bloomberg. About 58 percent of total issuance in the market has been for refinancing, the data show. In the previous five years, the average had been 40 percent.
The yield on top-rated tax-exempt bonds due in 10 years declined to 1.9 percent in the week ended June 22, the first drop in three weeks, according to a Bloomberg Valuation Index. The interest rate fell to 1.74 percent on Feb. 2, the lowest since at least January 2009, when the index begins.
Georgia, with top ratings from the three biggest rating companies, sold about $737 million in bonds last week to partially refund debt, with a 10-year portion priced to yield 1.86 percent, Bloomberg data show.
The U.S economy is forecast to grow 2.2 percent this year, compared with a contraction of 0.12 percent for Europe, Bloomberg surveys of economists show. The expansion of China’s gross domestic product may fall 1 percentage point from last year to 8.2 percent.
“Treasury returns are definitely a reflection of the outlook for growth,” Dan Orlando, managing director and head of U.S. government trading at Deutsche Bank AG in New York, said June 21 in a telephone interview. “There are concerns globally, certainly in Europe. There’s potential for China slowdown, the fiscal cliff here in the U.S., and we have our own problems on the economic front as well.”
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