Treasuries Return Most Since 2008 as Europe Crisis Fuels Demand

Treasuries had the biggest annual return since the depths of the financial crisis in 2008 as Europe’s debt turmoil spurred investor demand for refuge even as Standard & Poor’s cut America’s credit rating.

U.S. 10-year note yields ended 2011 within a quarter-percentage point of a record low while data showed the U.S. economy was strengthening. U.S. payrolls increased in December, a report next week is forecast to show. Treasuries were supported by the Federal Reserve, which pledged to hold its benchmark interest rate near zero until mid-2013 and took additional action to try to lower borrowing costs.

“There’s still a lot of fear in the market,” said Anthony Cronin, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed. “If a country like Italy or Spain is unable to fund themselves, will the other countries be able to pick up the slack? Will that cause a major banking crisis?”

The benchmark 10-year note yield closed at 1.88 percent yesterday in New York, according to Bloomberg Bond Trader prices, its lowest at year-end since at least 1963. It tumbled 142 basis points, or 1.42 percentage points, from Dec. 31, 2010, in the biggest annual decrease since the 181 basis-point drop in 2008. The yield touched 1.67 percent on Sept. 23, a record low.

Thirty-year bond yields dropped 144 basis points, also the most in three years, to 2.89 percent. Two-year note yields fell 35 basis points to 0.24 percent, their lowest level at the end of a year since at least 1977.

Annual Returns

Treasuries returned 9.6 percent in 2011 through Dec. 29, according to Bank of America Merrill Lynch indexes, beating stocks and commodities. Long bonds gained 35 percent, and 10-year notes rose 17 percent. The MSCI All Country World Index of equities lost 6.9 percent after accounting for reinvested dividends, and the Standard & Poor’s GSCI Total Return Index of commodities declined 1.2 percent.

German bonds also gained 9.6 percent, according to the Merrill Lynch indexes.

Treasuries climbed as Europe’s two-year-old debt crisis persisted through summits and rescue efforts. The turmoil, which led to bailouts of Greece, Ireland and Portugal, now threatens Spain and Italy.

U.S. bonds extended gains yesterday as Spain’s government moved to raise taxes and cut spending to tackle a larger-than-forecast budget deficit. The country’s fiscal shortfall this year will reach 8 percent of gross domestic product, spokeswoman Soraya Saenz de Santamaria said at a press conference in Madrid.

‘More Foggy’

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said economic growth in the 17-nation currency region “isn’t good.”

“This means that in 2012 we have to be prepared for the situation to become more foggy, to say it in a friendly way,” Juncker said yesterday on RTL Luxembourg radio.

Concern Europe’s turmoil is worsening offset reports showing the U.S. recovery is building momentum. Growth in the world’s biggest economy will quicken to 2.1 percent in 2012 from 1.8 percent in 2011, a Bloomberg survey showed.

U.S. jobless-benefit applications over the past month fell to a three-year low, data showed Dec. 29. The Institute for Supply Management-Chicago Inc. said its business barometer was at 62.5 in December, compared with a Bloomberg poll forecast of 61. Readings above 50 signal growth.

Nonfarm Payrolls

Nonfarm payrolls added 150,000 jobs in December, after gaining 120,000 in November, a Bloomberg News survey forecast before the government reports the data on Jan. 6. The unemployment rate was projected at 8.7 percent.

“On its own, rates would be significantly higher in the U.S., but we are not an island unto ourselves,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The exogenous impact from Europe is clearly keeping our rates much lower than they would be otherwise.”

Treasury 10-year yields will advance to 2.66 percent by the end of 2012, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings.

The government drew record demand at its bond auctions in 2011, even after S&P downgraded the U.S. to AA+ for the first time from the top AAA level. The rating company criticized federal lawmakers for failing to cut spending enough to reduce budget deficits that exceed $1 trillion a year.

Most Since 1992

The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold this year. It was the most since the government began releasing the data in 1992 during the George H. W. Bush administration, and a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.

The Fed completed in June a $600 billion program of buying Treasuries to spur growth. It was the central bank’s second round of asset purchases under quantitative easing.

In October, reacting to an unemployment rate that had been near or above 9 percent since 2009, the Fed began a program to lower borrowing costs by replacing $400 billion of shorter-term assets in its holdings with longer-term debt.

The central bank said yesterday it will buy about $45 billion of Treasuries in January and sell about $44 billion as part of the program, known by traders as Operation Twist after a similar effort in the 1960s.

U.S. government securities rose in December even as Treasuries held in custody at the Fed for foreign central banks and other official investors fell by $68.9 billion, the biggest four-week drop on record, according to Fed data. The slide came as the Dollar Index, which tracks the greenback against the currencies of six trade partners, rose 2.3 percent this month.

“It’s not unlikely they are repatriating assets to shore up their own economies,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

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