Bloomberg News

Bonds Better Off With 6.5% Under Obama From Bush’s 4.6%

October 29, 2012

Bonds Better Off With 6.5% Return Under Obama From Bush’s 4.6%

U.S. President Barack Obama, right, speaks as Mitt Romney, Republican presidential candidate, listens during the second presidential debate on Tuesday, Oct. 16, 2012. Obama backs the Fed while Romney said he wouldn’t reappoint Chairman Ben S. Bernanke to a third term in 2014. Scott Eells/Bloomberg

Whether they favor President Barack Obama or Republican challenger Mitt Romney in the Nov. 6 election, bond investors are better off now than four years ago.

From Treasuries to mortgage securities to corporate bonds, returns on U.S. fixed-income assets have averaged 6.5 percent throughout Obama’s term, exceeding the 4.6 percent during the previous four years under George W. Bush, according to Bank of America Merrill Lynch indexes. Yields on America’s fixed-income assets yield seven basis points less than the global average, compared with 51 basis points more back then, the data shows.

Supported by $2.3 trillion of bond purchases by the Federal Reserve and Obama’s $787 billion fiscal stimulus, corporate borrowing has revived, as have commercial and industrial loans, and mortgage rates are at record lows amid signs that housing is starting to improve with consumer confidence. Obama backs the Fed while Romney said he wouldn’t reappoint Chairman Ben S. Bernanke to a third term in 2014.

“It’s been a spectacular four years for the bond market,” Robert Tipp, chief investment strategist in Newark, New Jersey, for Prudential Financial Inc.’s fixed-income division, which oversees $335 billion, said in an Oct. 26 telephone interview. “In the U.S. the risk isn’t so much the economy, which is doing reasonably well,” he said. “The risk is policy makers are tapped out.”

‘Depression Levels’

Prudential is buying investment-grade obligations of financial firms and structured debt, Tipp said. Four years ago, when the insurer managed about $200 billion, he was buying high- quality corporate bonds “trading at depression levels” and commercial mortgage-backed securities.

Fixed-income assets are rallying even as companies step up borrowing and government debt swells to $16 trillion, from $10.6 trillion four years ago. The Fed said in a statement Oct. 24 that benchmark interest rates about zero “are likely to be warranted at least through mid-2015,” indicating its policies will continue to contain yields.

Individuals poured $168.9 billion into taxable fixed-income mutual funds from January through August, up from $135.2 billion for all of 2011 and compared with $10.8 billion in 2008, according to Investment Company Institute data.

Even as the Fed has printed money to buy bonds, inflation remains quiescent with consumer prices rising at an average annual rate of 1.6 percent since 2009, compared with a 3.3 percent pace the previous four years, government data show.

Falling Yields

Treasury 10-year yields declined 2 basis points last week, or 0.02 percentage point, to 1.75 percent, and are down from about 4 percent four years ago. The yield was three basis points lower at 1.71 percent as of 9:55 a.m. in New York.

U.S. government debt securities have returned 24.2 percent since the end of October 2008, including reinvested interest, or 5.59 percent a year, Bank of America Merrill Lynch’s U.S. Master Index shows. That compares with 21.4 percent for government debt worldwide, according to the firm’s indexes.

“By almost any measure of bond market performance, the markets are stronger now than they were then,” said James Kochan, chief fixed-income strategist at Wells Fargo Funds Management LLC in Menomonee Falls, Wisconsin, in an Oct. 23 telephone interview.

Relative Strength

Treasury yields, which were already at record lows when Obama took office, have fallen as the worsening European sovereign debt crisis and the relative strength and stability of the U.S. boosted demand for dollar-denominated assets.

Yields on U.S. fixed-income assets average 1.62 percent on Oct. 25, lower than the global average of 1.69 percent, Bank of America bond indexes show. When Obama took office the average for American debt securities was 3.93 percent, above global average of 3.41 percent.

This year’s performance in U.S. bonds exceeds the 5.7 percent gain in Europe and the 2 percent in Japan. Returns under Obama are the highest since the 7.5 percent average during Bill Clinton’s second term, according to Bank of America indexes.

Where else except the U.S. “can you invest your money at a high investment-grade in large sums and be sure you’ll get your money back in the future?” asked Chris Ahrens, an interest-rate strategist at UBS Securities LLC in Stamford, Connecticut, a primary dealer. “It’s money good.”

‘Panic Mode’

The Fed’s QE program started two months after the collapse of Lehman Brothers Holdings Inc., with a November 2008 commitment to buy $500 billion of mortgage securities and $100 billion of debentures of Fannie Mae and Freddie Mac.

Policy makers raised the purchase targets in March 2009 to $1.25 trillion of mortgage bonds, $200 billion of agency debt and added $300 billion of Treasuries. In November 2010, the Fed announced it would acquire $600 billion of Treasuries.

“The markets really were in a panic mode,” said James Sarni, senior managing partner at Payden & Rygel in Los Angeles, which manages $60 billion, in an Oct. 23 telephone interview. “The Fed has been very effective and has done a good job of keeping the markets from disintegrating.”

At the same time, Obama pushed through a $787 billion stimulus package including tax cuts and increases in spending.

Gross domestic product is forecast to expand 2.1 percent this year, compared with 1.8 percent in 2011, according to the median estimate of 89 economists surveyed by Bloomberg.

Rising Confidence

Confidence among U.S. consumers rose in October to the highest level since before the last recession began five years ago, with the Thomson Reuters/University of Michigan final sentiment index climbing to 82.6.

A Gallup poll of registered voters released Oct. 26, or nine days before the election, showed the race between Obama and Romney in a dead heat. The poll of about 3,050, which has a margin of error of two percentage points, showed 48 percent of respondents would vote for Obama and 48 percent for Romney if the election were held that day.

The trade-offs from the monetary and fiscal stimulus are the risk of faster inflation, four years of budget deficits exceeding $1 trillion and a rising a debt load for the government just as the bond market is trading at its most expensive levels ever.

Treasury 10-year yields exceed inflation as measured by the personal consumption expenditures index, a gauge preferred by Fed, by about 45 basis points, below the median of 292 basis points the past 20 years.

Auction Demand

“If market forces had driven us down to these levels excluding the involvement of the Federal Reserve, maybe I’d feel better” about current yields, Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, which oversees $15 billion in assets, said in a telephone interview Oct. 23. “What happens when the medicine goes away?”

Confidence in U.S. assets hasn’t been a concern. Investors bid a record $3.17 for each dollar of the $1.79 trillion in notes and bonds sold at Treasury auctions this year, compared with $2.23 for each dollar of the $922 billion sold in 2008.

The central bank’s actions revived the housing market. The average rate for 30-year home loans has declined to 3.41 percent from 5.12 percent when Obama took office, according to Freddie Mac. Housing starts climbed 15 percent in September from August to a four-year high, Commerce Department data showed Oct. 17.

Mortgages, Corporates

“The U.S. is thought to be among the best developed- economy performers going forward,” Christopher Sullivan, who oversees $2 billion as chief investment officer at United Nations Federal Credit Union in New York, said in a phone interview Oct. 19. “That in and of itself is attracting capital.”

Bonds backed by mortgages have returned an average 6.52 percent annually since the end of October 2008, as yields fell to 1.36 percent from 5.86 percent, according to the Bank of America Merrill Lynch U.S. Mortgage Master index.

Corporate bond sales total $4.86 trillion since 2008, the most ever in a four-year presidential term. The securities have returned 61 percent, as yields dropped to 3.60 percent from 9.25 percent, Bank of America indexes show.

Bank commercial and industrial lending has risen 24 percent to $1.48 trillion as of Oct. 10, from a 33-month low of $1.2 trillion in October 2010, Fed data show.

Bonds tied to consumer loans and commercial mortgages have returned 36.1 percent since October 2008, Bank of America indexes show. The amount of securities backed by car loans issued by auto companies surged to $90 billion in 2012, up from $49 billion in all of 2008, data compiled by Bloomberg show.

Relative Debt

Vehicle deliveries this year through September climbed 15 percent to 10.9 million from a year earlier, according to researcher Autodata Corp. in Woodcliff Lake, New Jersey. Sales are on pace for the best year since 2007.

While government debt has risen, total U.S. public and private obligations have shrunk to a six-year low relative to the size of the economy as homeowners, cities and companies scale back on borrowing.

Private-sector borrowing is down by $4 trillion the past four years to $40.2 trillion, according to data compiled by Bloomberg. Indebtedness including that of federal and state governments and consumers is 3.29 times GDP, the least since 2006 and down from a peak of 3.59 in 2008.

“Overall the environment is in a better place than it was at the height of the crisis,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania, in an Oct. 24 telephone interview. “You’ve seen the market go through a healing process. We’ve come a long way.”

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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