The reluctance to purchase debt continues. Leon Cooperman, chairman of $3.5 billion hedge fund Omega Advisors Inc., said in a presentation at the Value Investing Congress in New York on Oct. 18 that he "wouldn't be caught dead owning a U.S. government bond."

What the bears failed to anticipate was that Americans would continue to pare debt and boost savings. Much of that money found its way into the fixed-income markets as banks and investors sought high-quality debt as unemployment held at or above 9 percent every month except for two since May 2009, Europe's fiscal crisis threatened to push the global economy back into recession and stock markets fell.

"It's hard to envision a scenario where we see significantly better than two percent growth, with increased fiscal austerity and headwinds from the leverage bubble and persistent unemployment," said Rick Rieder, who oversees $620 billion as chief investment officer of fundamental fixed income at New York-based Blackrock Inc. The firm is the world's largest money manager, investing $3.45 trillion.

The U.S. savings rate has tripled to 3.6 percent since 2005 and has averaged 5.1 percent since the depth of the financial crisis in December 2008, compared with 3.1 percent for the previous 10 years, according to government data. Debt mutual funds have attracted $789.4 billion since 2008, compared with a $341 billion drop in equity funds, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.

Banks, still trying to rebuild their balance sheets after taking more than $2 trillion in writedowns and losses since the start of 2007, have boosted holdings of Treasuries and government-backed mortgage securities to $1.68 trillion from $1.62 trillion in December, according to the Fed. Foreign investors increased their stake in Treasuries to $4.57 trillion in August from $4.44 trillion at the end of 2010, according to the latest Treasury Department data.

The bond market posted its first 30-year gain over the stock market in more than a century during the period ended Sept. 30. The last time was in 1861, leading into the Civil War, when the U.S was moving from farm to factory, according to Siegel, author of the 1994 book "Stocks for the Long Run," in a telephone interview Oct. 25.

"The rally in bonds is a once in a millennium event, but it's absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform," he said. "If you missed the rally in bonds, well, then that's it."

Gross eliminated Treasuries from the Total Return Fund in February and owned derivative bets against the debt in March. He moved 16 percent of its assets into U.S. government securities as of September, saying earlier this month in a note to clients that he misjudged the extent of the economic slowdown and called his performance this year "a stinker."

Local government bonds are set for the biggest gains since 2009 as defaults fell last quarter. Cities and states are reducing expenses instead of forgoing payments on debt even as they confront fiscal strains in the wake of falling revenue.

Whitney said on the CBS's "60 Minutes" in December that there would be "hundreds of billions of dollars" of municipal defaults this year. Brighton, Alabama, a city of 2,945 near Birmingham, was the only U.S. municipality to miss a general- obligation debt payment in 2011. Defaults are about 25 percent of 2010's $4.3 billion tally, according to Bank of America Corp.