U.S. Treasuries Surged on Safe-Haven Demand to Best Performance Since 1995
Strong demand for U.S. government bonds in 2011 pushed longer-maturity Treasuries to their best performance since 1995.
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The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold this year — the most since the government began releasing such data in 1992 under the George H. W. Bush administration.
In 2011, the U.S. drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills auctioned on December 20, even though they pay zero percent interest.
Treasuries due in 10 years or more returned 25.6 percent this year as the European debt crisis and slowing global growth drove investors to the safety of U.S. assets, helping to keep down borrowing costs and making it cheaper as a percentage of gross domestic product to finance record deficits than it was when the nation last had budget surpluses.
The last time longer-maturity Treasuries were returning as much was in 1995, when they rallied 30.7 percent in one year.
The news means that President Barack Obama is unlikely to have much difficulty financing a fourth consecutive year of $1 trillion budget deficits.
“We have a significantly shrinking supply of risk-free assets in the world and U.S. Treasuries are one of the few left,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers required to bid at the auctions.
U.S. Treasuries in general returned 8.9 percent this year, while global sovereign debt and mortgage-backed securities rose 5.8 percent and corporate bonds climbed 4.3 percent.
The dollar has been gaining against the world’s major currencies, appreciating 1.2 percent so far this year, as measured by the IntercontinentalExchange Inc.’s Dollar Index. The gauge rose 1.5 percent in 2010.
While yields on 10-year notes rose 18 basis points last week to 2.02 percent, they were down from 3.3 percent at the end of 2010. The comparatively lower yields mean that interest expense accounted for only 3 percent of the U.S. economy in fiscal 2011 ended September 30, down from 4 percent in 1999. When the U.S. ran budget surpluses between 1998 and 2001 the bid-to-cover ratio was 2.26.
“Most people thought if the U.S. was downgraded it would lead to higher rates. Most people argued that increasing deficits would be more difficult to finance,” but the opposite has been the case, said John Fath, a principal at the investment firm BTG Pactual in New York who manages $2.5 billion of bonds.
Ten-year yields have steadily declined since 1981, when the yield on benchmark for everything from corporate bonds to mortgages exceeded 15 percent. In January 1993, when the elder Bush’s presidency came to an end, they stood at 6.57 percent, down from 9.54 percent in early 1989 when he took office as the Federal Reserve cut its target rate for overnight loans between banks. Yields have averaged 4.92 percent since former President Bill Clinton took office in 1993.
The financial crisis boosted investor demand for Treasuries as the value of higher risk assets such as stocks and corporate bonds plummeted. The Fed has kept its target rate in range of zero to 0.25 percent since December 2008, and has pledged to keep it there until mid-2013.
Bid-to-cover ratios at Treasury auctions averaged $2.99 last year, up from $2.50 in 2009 and $2.23 in 2008. Toward the end of this year, demand accelerated, with investors bidding $3.20 per dollar of securities sold in November and December amid concern over the health of the European economy.
The U.S. Treasury market has benefited from being one of the few remaining refuges for investors even as government borrowing surpassed $15 trillion. The Japanese yen is the only major currency to have outperformed the U.S. dollar this year, rising 4.1 percent.
U.S. government debt has gained 39 percent since the start of 2007, though budget deficits have totaled $4 trillion in the three fiscal years from October 2008 through September 2011. The budget shortfall may narrow from $1.3 trillion this year to $1.1 trillion in fiscal 2012, according to a survey of bond dealers in the minutes of the Treasury Borrowing Advisory Committee’s November 2 meeting.
As the nation approaches the debt limit set by law, the Obama administration will ask Congress to increase federal borrowing authority by $1.2 trillion, according to a Treasury Department official. The White House will send the request to Congress on December 30, the day the national debt is projected to rise to within $100 billion of the $15.194 trillion limit.
It is important that demand keeps up, as about 45 percent of the $7.76 trillion in U.S. Treasury notes and bonds will need to be refinanced by the end of 2014.
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