Updated March 24 at 9:24am

Treasuries advance, headed for best annual return since 2008


NEW YORK - Treasuries rose, poised for their biggest annual gain since 2008, as investors sought the relative safety of U.S. government bonds on concern the euro-region debt crisis will worsen.

U.S. debt has returned 9.6 percent in 2011, according to Bank of America Merrill Lynch data, even after Standard & Poor’s cut the nation’s AAA rating on Aug. 5. German bunds also gained 9.6 percent, Japanese bonds advanced 2.1 percent and U.S. corporate debt rallied 7.3 percent. Treasuries are poised to beat stocks, commodities and the dollar for the year, even as reports indicate the U.S. economy is recovering.

“On its own, rates would be significantly higher in the U.S., but we are not an island unto ourselves,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The exogenous impact from Europe is clearly keeping our rates much lower than they would be otherwise.”

The 10-year yield fell two basis points, or 0.02 percentage point, to 1.88 percent at 9:17 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 gained 1/8, or $1.25 per $1,000 face amount, to 101 1/32. Five-year note yields decreased two basis points to 0.86 percent.

ECB Deposits

The European Central Bank said today overnight deposits from banks approached an all-time high in a sign banks financial firms are reluctant to lend money.

Euro-area banks parked 445.7 billion euros ($577 billion) with the ECB yesterday, up from 436.6 billion euros a day earlier, the central bank said. Deposits reached 452 billion euros Dec. 27, the most since the euro’s introduction in 1999.

The Securities Industry and Financial Markets Association recommended trading in Treasuries should close at 2 p.m. in New York and remain shut on Jan. 2 in observance of New Year’s Eve and New Year’s Day.

Benchmark 10-year yields dropped to a record 1.67 percent on Sept. 23 as investors sought the relative safety of U.S. debt. Two years of summits have failed to contain a European debt crisis that has led to bailouts of Greece, Ireland and Portugal and now threatens Italy and Spain.

S&P downgraded the U.S. rating this year for the first time, criticizing lawmakers for failing to cut spending enough to reduce budget deficits that exceed $1 trillion a year.

“It was a really unusual year, one of the best,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “Nobody believed Treasuries would be bought under 2 percent. Investors were forced to buy because of the European debt situation.”

Bill Demand

A four-week bill sale on Dec. 20 drew bids for a record 9.07 times the amount offered even though rates on the securities were below zero in New York trading.

Bill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co., was among those caught off guard by the rally.

Gross was betting against U.S. government securities earlier in the year in the $241 billion Total Return Fund. The debt comprised 23 percent of holdings as of Nov. 30, according to the Newport Beach, California-based company’s website.

The fund has returned 3.8 percent in 2011, underperforming 70 percent of its competitors, according to data compiled by Bloomberg.

The median estimate of 70 economists and strategists surveyed by Bloomberg in early January was for 10-year yields to end this year at 3.75 percent.

U.S. government securities were some of the best assets to own in 2011.

Inflation-Linked Debt

Treasury Inflation Protected Securities returned 14 percent, the most since 2002, the Bank of America figures show. An index of bonds around the world rallied 5.8 percent, based on the data.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 1.99 percentage points. The average over the past decade is 2.13 percentage points.

Stocks have lost 6.9 percent this year after accounting for reinvested dividends, based on the MSCI All Country World Index.

The Dollar Index tracking the U.S. currency against six foreign-exchange counterparts rose 1.7 percent in 2011. The Standard & Poor’s GSCI Total Return Index of commodities slipped 1.3 percent.

Growth to Quicken

Growth in the world’s biggest economy will quicken to 2.1 percent in 2012 from 1.8 percent in 2011, a Bloomberg survey of banks and securities companies shows. U.S. jobless-benefit applications over the past month fell to a three-year low, data showed yesterday, and a report next week is forecast to U.S. payrolls increased in December.

The pace of expansion will be 8.5 percent in China, 1.66 percent in Japan and 0.45 percent in Germany, based on the responses.

U.S. 10-year rates will advance to 2.67 percent by the end of 2012, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.


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