(Bloomberg News) With less than a month to go, returns in the U.S. bond market are poised to reach the highest in nine years, even as the amount of U.S. government borrowing surpasses $15 trillion for the first time.

Everything from Treasuries to corporate bonds to mortgage securities is on pace to gain 7.32 percent on average, according to Bank of America Merrill Lynch index data. That would exceed the 6.8 percent gain in all of last year and be the most since the 10.3 percent in 2002. Yields on dollar-denominated notes have fallen below the rest of the world's debt by the most on record.

The returns show that investors are seeking safety in the world's largest economy, even after gridlock in Washington over fiscal imbalances led Standard & Poor's to lower the nation's top credit grade. As Europe's fiscal crisis imperils the global financial system, investors are looking past America's $1.3 trillion deficit to buy its debt at almost any price.

"People are not worried about the long-term debt," said Joshua Feinman, global chief economist for DB Advisors, the asset management arm of Frankfurt-based Deutsche Bank AG. "There's certainly been a risk-aversion trade and what's going on in Europe makes Treasuries look attractive for sure."

U.S. daily total public debt outstanding has risen 9 percent from $13.86 trillion a year ago and compares with $5.66 trillion at the end of 2000. The level is approaching the $15.194 trillion borrowing limit that was raised from $14.3 trillion in August. At the same time, European leaders are struggling to contain bulging deficits that threaten the future of the region's common currency.

Publicly Traded

The publicly traded U.S. debt rose to a record $9.75 trillion in October, Treasury Department figures show. So-called intragovernmental holdings, owned by trust funds and other government agencies, totaled $4.72 trillion.

"If you look at the other large, developed economies, the U.S. is in a much better position than the others," said Krishna Memani, who oversees $70 billion as director of fixed income at OppenheimerFunds Inc. in New York. "The U.S. economy at the end of November is in a much better place than it was at the end of September, and that should help credit at the margin."

Elsewhere in credit markets, the cost of insuring against default on European sovereign and bank debt headed for the biggest weekly declines ever amid optimism leaders are finally getting to grips with the crisis.

BP Offering

BP Plc sold $1.6 billion of debt in a three-part offering yesterday as credit confidence in the oil company climbed to the highest level in a month. Moody's Investors Service has proposed changes in rating criteria that may trigger cuts on commercial- mortgage bonds, while home-loan securities guaranteed by Ginnie Mae traded at close to record premiums over Fannie Mae debt.

The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments dropped 11 basis points to 324, taking the drop this week to 61 basis points. The Markit iTraxx Financial Index of default swaps linked to the senior bonds of 25 banks and insurers fell 17 basis points to 279.5, making a weekly decline of 78.5. Both gauges were at record highs on Nov. 25.

German Chancellor Angela Merkel pushed for closer economic ties among euro nations in a speech previewing a Dec. 9 summit, which fueled a rally triggered by central banks' efforts this week to cut the cost of emergency dollar funding.

Notes Issue

BP Capital Markets Plc issued $500 million of floating-rate notes due in June 2013 that pay 45 basis points more than the three-month London interbank offered rate, according to data compiled by Bloomberg. A $450 million portion of two-year floaters pay a spread of 62.5 basis points over Libor and $650 million of three-year, 1.7 percent bonds yield 130 basis points more than similar-maturity Treasuries.

Credit-default swaps tied to BP's debt have dropped to 115 basis points from 176 basis points on Oct. 4, the highest level since September 2010, according to data provider CMA. The contracts peaked at 577 in June of that year as BP struggled to stem the worst ever U.S. oil spill in the Gulf of Mexico.

Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. Contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.

Most-Traded Bonds

Bonds of Transocean Ltd. were the most actively traded U.S. corporate securities by dealers yesterday, with 284 trades of $1 million or more, a day after the Vernier, Switzerland-based company's $2.5 billion offering, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority.

The world's largest offshore driller's $1.2 billion of 6.375 percent notes due December 2021 rose 3.7 cents from the issue price to 103.65 on the dollar yesterday, Trace data show.

Moody's has requested comments on altering the way it treats so-called interest-only classes of securitized debt, which could affect bonds from $600 billion of deals backed by commercial property loans, Deutsche Bank analysts led by Harris Trifon in New York said in a report on Nov. 30.

The ratings criteria will be implemented in the first weeks of 2012. This could force some investors to sell their holdings as securities, composed of interest payments on the underlying loans, typically carry top grades, the analysts wrote.

Ginnie Mae

In a signal of the value of the explicit guarantee bestowed on Ginnie Mae debt, the price difference between U.S.-owned Ginnie Mae's 4.5 percent, 30-year securities and similar debt from government-supported Fannie Mae has almost tripled this year to 3 cents on the dollar, exceeding 3.1 cents last month, Bloomberg data show.

"If you're an international buyer, you lean toward Ginnies because you'd rather have the full-faith-and-credit backing at any reasonable difference in spreads," said Peter Hirsch, the New York-based head of U.S. dollar rates and agency mortgage trading at Royal Bank of Canada's RBC Capital Markets unit.

The S&P/LSTA U.S. Leveraged Loan 100 index rose for a second day yesterday after 10 straight declines, increasing 0.06 cent to 90.53 cents on the dollar. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, had fallen from 92.01 cents on Nov. 14.

Leveraged loans and high-yield bonds are rated below Baa3 by Moody's and lower than BBB- by S&P.

Emerging Markets

In emerging markets, relative yields rose 2 basis points to 408 basis points, or 4.08 percentage points, according to JPMorgan Chase & Co.'s EMBI Global index. The measure has ranged from 259 on Jan 5 to 496 on Oct 4.

Demand for U.S. bonds is increasing amid this year's global turmoil. Yields fell to 2.22 percent on Nov. 28, according to the Bank of America Merrill Lynch U.S. Broad Market Index. That compared with 2.72 percent the same day on the firm's Global Broad Market, Ex-U.S. Dollar index. Yields on bonds from elsewhere in the world were lower as recently as May 12, when they averaged 2.74 percent versus 2.76 percent in the U.S.

The benchmark 10-year Treasury yield rose to 2.12 percent, from 2.09 percent yesterday and after touching a record-low 1.72 percent on Sept. 22. The debt yielded 6.44 percent at the end of 1999 when the U.S. had a budget surplus.

Corporate bonds in dollars have returned 4.7 percent through Nov. 30, on pace for their third-straight annual gain, Bank of America Merrill Lynch index data show. That compares with a loss of 0.4 percent for European company debt.

Haven Appeal

The haven appeal of U.S. assets has been burnished amid signs of strength in the world's largest economy. Gross domestic product will likely expand 2.2 percent next year, compared with 1.54 percent for the Group of 10 economies as a whole, according to separate Bloomberg surveys.

"You don't want to go into European debt or European equities today, and maybe you don't even want to go into them in two or three months," Komal Sri-Kumar, chief global strategist at TCW Group Inc., which oversees about $118 billion, said in an interview on Bloomberg Television's "Surveillance Midday" with Michael McKee. "There's a big shoe about to drop and if you're willing to go through that and you have a strong stomach, mid- 2012 is roughly my date when all the positive things start to happen."

Mortgage securities guaranteed by Fannie Mae and Freddie Mac or Ginnie Mae have gained 5.4 percent this year, compared with 5.7 percent in 2010, Bank of America Merrill Lynch index data show. Returns on the debt have been positive each year since 1995.

U.S. Treasuries

Even as U.S. government borrowing climbed, Treasuries returned 8.8 percent as of Nov. 30, the best performance since 2008, Bank of America Merrill Lynch index data show.

Investors have bid a record $3.02 for each of the $1.96 trillion of Treasury notes and bonds sold this year. That compares with the $2.99 recorded last year when the Treasury sold $2.2 trillion, and is up from $2.56 in 2007 when the U.S. issued $581 billion in notes and bonds, government data show.

Borrowers from Dallas-based AT&T Inc., the second-largest U.S. wireless phone carrier, to HCA Inc., the biggest hospital chain, have issued $1.08 trillion of debt in the U.S. this year, up from $1.07 trillion over the same span of 2010, Bloomberg data show.

The bonds are being bolstered as net U.S. fixed-income issuance, including everything from Treasuries to corporate bonds to mortgage-backed securities, fell to $1.2 trillion this year from $2 trillion in 2010, according to Credit Suisse Group AG data. The bank's U.S. interest-rate strategists forecast net borrowing will be about the same next year.

'Meeting Demand'

"Supply is not meeting demand," said Ira Jersey, an interest-rate strategist in New York at Credit Suisse, one of 21 primary dealers that trade directly with the Federal Reserve. "What has to happen is the price has to go up, and that's what you're seeing."

S&P cut the U.S. to AA+ from AAA on Aug. 5. The nation lost its last stable outlook from the three-biggest credit-ranking companies after Fitch Ratings lowered the nation to negative on Nov. 28 following the so-called congressional supercommittee's failure to agree on deficit cuts.

The Fed, the European Central Bank and central banks in the U.K., Canada, Switzerland and Japan cut emergency funding costs for European banks on Nov. 30 in an effort to boost liquidity in financial markets that dwindled as the euro area's debt crisis grew.

"The European situation, of course, it's the biggest risk out there by far," DB Advisors' Feinman said. "People think eventually the U.S. will get its house in order, or else why would they be lending at 2 percent for 10 years?"