Being pessimistic is the way to go in the bond market this year.
Investors who plowed into the longest-dated U.S. government debt, which typically performs best during times of economic stress, have reaped a 17.5 percent return since 2013. That’s more than twice as much as gains on the Standard & Poor’s 500 Index and three times the returns on junk-rated securities.
BlackRock Inc. (BLK) chief investment strategist Russ Koesterich says bond buyers are right to take a muted view on U.S. growth. The expansion of the world’s biggest economy may be hampered for the next decade or two by its record borrowing, he said. The volume of U.S. Treasuries outstanding has swelled to $12.2 trillion from $4.5 trillion in 2007.
“If you have higher debt levels that’s likely to act as a drag on growth,” Koesterich said in a telephone interview. “Slower growth also suggests that rates may stay low for longer.”
The thinking goes that if a nation has to pay back a mountain of debt, it won’t be able to spend as much in the future on projects and initiatives that could boost its economy.
Federal Reserve officials keep cutting their forecasts for the longer-term expansion of the U.S. and insisting they’ll hold interest rates low for a prolonged period.
Two months ago, they lowered their predictions for growth to 2.1 percent to 2.3 percent, from 2.2 percent to 2.3 percent in March. They thought a more-optimistic range of 2.5 percent to 2.8 percent was in the cards in June 2011, based on the central tendency of their projections.
Perhaps this is why buyers are still funneling into 30-year Treasury bonds that are yielding 3.2 percent -- almost a percentage point less than they have on average during the past decade and about the least relative to 10-year notes since 2009.
While these investors may not be planning to hang onto the debt until maturity, they seem pretty negative about how much the economy can really take off.
Last year, things were looking up for the U.S.: Stocks (SPX) gained 29.6 percent and 30-year bonds lost 15.1 percent. This year, the U.S. will expand at a 2 percent rate, down from 2.2 percent in 2013, according to analysts surveyed by Bloomberg.
The last time bond buyers felt so good about 30-year debt was during the European sovereign debt crisis in 2011. The bonds rallied 35.5 percent that year. As the financial system collapsed in 2008, they returned 41.2 percent, Bank of America Merrill Lynch index data show.
Investors are buying longer-term securities now because rapid growth doesn’t look that plausible.
“There’s a fair amount of evidence that when debt levels reach these levels, they do act as a drag on growth,” BlackRock’s Koesterich said.