“President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year.”
Jan. 1 (Bloomberg) — Treasuries were the worst performing sovereign debt market in 2009 as the U.S. sold $2.1 trillion of notes and bonds to fund extraordinary efforts to bolster the economy and financial markets.
Investors in U.S. debt lost 3.5 percent on average through Dec. 30, according to Bank of America Merrill Lynch indexes, the biggest annual slide since at least 1978. The 10-year Treasury yield reached its highest level in six months yesterday before a Labor Department report next week forecast to show payrolls were unchanged in December after the U.S. economy lost jobs in every month since January 2008.
“The financial system has survived,” said Ray Remy, head of fixed income in New York at Daiwa Securities America Inc., one of 18 primary dealers that trade directly with the Federal Reserve. “Now the market has to deal with other issues like deficit spending, tremendous issuance, the weakness in the dollar. How significant is this recovery, and what happens when you take away some of the government stimulus.”
The yield on the benchmark 10-year note climbed to 3.84 percent from 2.21 percent at the end of 2008, according to BGCantor Market Data. The yield touched 3.91 percent yesterday, the highest level since June 11.
Two-year note yields rose to 1.14 percent from 0.76 percent.
‘The Big Gamble’
“I expect Treasury yields to rise 30 to 40 basis points across the curve in the first half of next year,” said David Keeble, head of fixed-income strategy at Calyon in London. “The end of the of the Fed’s quantitative easing program will hurt the market. We also have to cope with a lot of supply. It doesn’t get smaller.”
The 10-year yield will rise to 4.01 percent at the end of 2010, according to the median of 60 economists surveyed by Bloomberg News. The two-year note yield will climb to 1.96 percent, according to the median response in a separate Bloomberg survey.
The government may say on Jan. 8 that payrolls were unchanged in December, according to the median estimate of economists in a Bloomberg News Survey. The unemployment rate rose to 10.1 percent from 10 percent, according to a separate survey.
President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year.
“This is the year of the big gamble,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “It’s about restoring confidence. Nobody knows whether confidence is enough by itself. But we have seen how a lack of confidence has allowed the Japanese economy to be uninteresting for two decades.”
Japanese government debt has returned 20 percent since 1999 after rallying 90 percent in the 10 prior years as the bursting of bubbles in the nation’s real estate and stock markets led to 20 years without significant growth for the economy or financial markets. Japan’s Nikkei 225 stock index fell 44 percent since 1999.
Treasuries have risen 82 percent in the past decade as collapses in the markets for stocks, real estate and risky debt assets have led investors to seek guaranteed return of their assets. The S&P 500 declined 24 percent in the past 10 years to 1,115.10.
Bailouts of the banking and automotive industries from the Obama administration, and the Fed’s decision to hold interest rates near zero through all of 2009, have helped bolster asset prices.
The Standard & Poor’s 500 Stock Index rose 24.5 percentage points this year compared with a 3.5 percentage point decline in Treasuries. The gap in performance is the most since at least 1978 and contrasts with the 52 percentage point advantage Treasuries achieved in 2008 when they climbed 14 percentage points and the S&P 500 plunged 38 percentage points.
Yields on investment-grade debt fell on Dec. 30 to within 2.85 percentage points of yields on government securities of similar maturity, the narrowest gap since April 2008, according to Merrill bond indexes. The yield difference was 6.56 percentage points in December 2008.
The 3.5 percent drop in Treasuries is the most this year among G-7 countries, followed by U.K. gilts, which lost 1.7 percent and Canadian debt’s 1.5 percent slump, Bank of America- Merrill Lynch bond indexes show. Holders of Italian debt gained the most, adding 8.1 percent.
Treasuries of all maturities lost 2.4 percent last month through Dec. 30, their worst performance since January, according to Merrill indexes, after a report showed the U.S. economy shed fewer jobs than forecast in November.
“Massive government intervention through conventional and unconventional means restored the animal spirits of the market,” said Colin Lundgren, head of institutional fixed income for RiverSource Institutional Advisors in Minneapolis, which manages $93 billion in fixed-income. “The likely loser in all this is Treasuries.”
The gap between U.S. 2- and 10-year yields, a barometer of the health of the U.S. economy, steepened to a record this month as investors bet an accelerating recovery will fuel inflation and hurt demand during unprecedented government debt sales.
The yield curve widened to 2.88 percentage points on Dec. 22, from 1.45 percentage points at the start of the year. It was at 2.70 percentage points yesterday.
The U.S. sold a record-tying $118 billion in notes this week. The government sold $2.109 trillion of notes and bonds in 76 auctions in 2009 after selling $922 billion in 2008.
Fed Chairman Ben S. Bernanke has cited a tame inflation outlook as a reason for keeping the target rate for overnight loans between banks at a record low zero to 0.25 percent. Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, show the improving economy may change sentiment and spark further bond declines.
The gap between yields on Treasuries and TIPS due in 10 years, a measure of the outlook for consumer prices, expanded to 2.44 percentage points on Dec. 29, the widest since July 2008. It was 2.41 percentage points yesterday.
To contact the reporters on this story: Daniel Kruger in New York at [email protected].
Last Updated: January 1, 2010 00:01 EST
By Daniel Kruger