Treasuries returned 6.4 percent in the period from July to September, the biggest quarterly gain including reinvested interest since the last three months of 2008, Bank of America Merrill Lynch indexes show. Company bonds returned 2.26 percent and mortgage securities gained 2.32 percent, the indexes showed. The Barclays U.S. Aggregate bond index gained 3.9 percent for the quarter.
The Standard & Poor's 500 stock index declined 14 percent while gold appreciated 7.8 percent. The dollar rose 5.7 percent in the last three months against a basket of currencies including the euro and the yen, according to IntercontinentalExchange Inc.'s Dollar Index.
The 1,095 taxable bond mutual funds that invest primarily in U.S. debt markets held an average 12 percent of assets in Treasuries last quarter, according to Chicago-based Morningstar Inc. Bets placed on U.S. debt using Treasury futures are not included in calculating the holdings.
"It's been painful to be underweight Treasuries during a time when you've seen an amazing rally," Daniel Shackelford, part of a group that manages $15 billion in bonds at T. Rowe Price Group Inc. in Baltimore, said in a Sept. 27 telephone interview.
"It's hard to look at a 10-year note below 2 percent, which is basically where the Fed is targeting inflation, and say that that's a value over a long period of time," said Shackelford, whose allocation to Treasuries "hasn't changed materially" from 18 percent as June 30. "We'll be in this low- growth, stale environment for a while, but I think that favors corporate balance sheets and mortgages more than it does Treasuries," he said.
The role of Treasuries in the Barclays index has grown during the financial crisis, increasing by 50 percent from 22 percent of the index at the end of 2007, while corporate bonds have dipped to 19 percent from 20 percent and mortgage securities have declined to 32 percent from 39 percent, Barclays data show.
"The majority of fixed-income growth since Lehman collapsed has been in Treasuries, so in many respects Treasuries have been the only game in town," Bret Barker, a money manager at Los Angeles-based TCW Group Inc., which oversees about $120 billion in assets, said in a Sept. 28 telephone interview. Lehman Brothers Holdings Inc. went bankrupt in September 2008.
"We don't see much value in Treasuries around these levels, but" investors without the debt face the risk of missing a rally, Barker said. The firm has about 20 percent of its bond assets in Treasuries, he said.
The 10-year Treasury yield began its plunge from 2.95 percent on July 28, after a Commerce Department report showed that the economy almost stalled in the first six months of 2011, prompting economists to lower their forecasts for growth. Yields were pulled lower again as investors sought the safety of Treasuries after S&P lowered the U.S. rating to AA+ from AAA.
In cutting the U.S. one step, S&P acknowledged that it had made a $2 trillion accounting error and then cited the weakening "effectiveness, stability and predictability of American policymaking and political institutions." The company, a unit of New York-based McGraw Hill Cos., since announced that Deven Sharma will step down at the end of the year and will be replaced by Douglas Peterson as president.