Barclays Capital Inc. cut its forecast for second-quarter economic growth on June 3 to a 2 percent annual rate from 3.5 percent. The U.S. jobless rate climbed to 9.1 percent last month. Home prices in 20 U.S. cities dropped in March to the lowest level since 2003, figures from the S&P/Case-Shiller index showed on May 31.

The amount of zero-coupon bonds created by Wall Street firms has climbed from $171.7 billion in November 2009, which was the least since February 2003. Strips lost 17 percent in the fourth quarter of 2010 as inflation concerns mounted and the Standard & Poor's GSCI index of 24 commodities rallied 15.7 percent, the best three-month return since the second-quarter of 2009. Treasuries lost 2.7 percent and U.S. corporate bonds declined 0.57 percent.

Banks also made fewer Strips because concern about inflation increased as the Fed's quantitative-easing programs and record borrowing by the administration of President Barack Obama pumped an unprecedented $2.3 trillion in cash into the economy.

"Two-year yields and in are going to be very-well anchored at these low levels," said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse Group AG, today in an interview with Erik Schatzker on Bloomberg Television. "On balance, we've seen more evidence that the Fed's going to be on hold for an extended period."

Best And Worst

Zero-coupon securities due in 30 years had their best and worst months in more than two decades during the last recession. The debt returned 26.7 percent in December 2008, a month after the consumer price index plunged 1.8 percent, the biggest drop in history, according to Bank of America Merrill Lynch index data. A month later, the securities lost 24 percent.

Returns for Strips due in 30 years of 5.3 percent in May top the 1.6 percent for Treasuries overall and 1.21 percent for corporate bonds, the data show.

Treasuries don't pay enough for Pacific Investment Management Co.'s Bill Gross, who reiterated on June 3 that mortgages, corporate bonds and sovereign debt of other nations are more attractive than U.S. government securities for his $243 billion Total Return Fund. Rates are too low once inflation is taken into consideration, with bonds due in 10 years and less yielding under the 3.2 percent increase in the consumer price index in the 12 months ended April 30.

Higher Rates

While returns on Pimco's flagship fund are lagging behind peers this year, Gross has a history of rebounding. In 2007, the Total Return Fund trailed the performance of 80 percent of comparable funds through June before rebounding to beat 99 percent of them for the year as the Fed began to lower interest rates, as he predicted, according to data compiled by Bloomberg.