(Bloomberg News) The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.
The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The U.S. drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.
While Standard & Poor's stripped the U.S. of its AAA credit rating on Aug. 5, Treasuries due in 10 years or more returned 25.6 percent this year. The spreading sovereign debt crisis in Europe and slower global growth are driving investors to the safety of U.S. assets, helping to contain borrowing costs and making it cheaper as a percentage of gross domestic product to finance deficits than when the nation last had budget surpluses.
"If the last two weeks are any indication of how next year will start, there's near-insatiable demand," Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that are required to bid at the auctions, said in a Dec. 21 telephone interview. "We have a significantly shrinking supply of risk-free assets in the world and U.S. Treasuries are one of the few left."
Beating Commodities, Stocks
The last time longer-maturity Treasuries returned as much as this year was in 1995, when they rallied 30.7 percent.
Treasuries were some of the best assets to own this year, returning 8.9 percent, compared with a decline of 8 percent for the Thomson Reuters/Jefferies CRB Index of raw materials and a 0.6 percent gain in the Standard & Poor's 500 Index of stocks. Global sovereign debt and mortgage-backed securities rose 5.8 percent, and corporate bonds climbed 4.3 percent, according to Bank of America Merrill Lynch bond indexes.
The dollar is poised to strengthen for a second straight year against its major trading partners, appreciating 1.2 percent as measured by IntercontinentalExchange Inc.'s Dollar Index. The gauge rose 1.5 percent in 2010.
"The U.S. is benefiting from a very unstable global environment," Scott Graham, the head of government bond trading at the Bank of Montreal's BMO Capital Markets unit in Chicago, a primary dealer, said in a Dec. 21 telephone interview. "At some point you'd think demand would wane if Europe gets settled."
While yields on 10-year notes rose 18 basis points, or 0.18 percentage point, last week to 2.02 percent, they are down from 3.3 percent at the end of 2010, Bloomberg Bond Trader prices show. The yield fell one basis point to 2.01 percent at 3:07 p.m. in New York, and the 2 percent security due November 2021 added 3/32, or 94 cents per $1,000 face amount, to 99 28/32.
Low yields mean that interest expense accounted for 3 percent of the economy in fiscal 2011 ended Sept. 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.
"Some of the trades that appeared obvious have been wrong," John Fath, a principal at the investment firm BTG Pactual in New York who manages $2.5 billion of bonds, said in a Dec. 21 telephone interview. "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."
Caught Off Guard