Geithner Bond Returns Trail Paulson, Beat Rubin
Timothy F. Geithner, who took over the Treasury Department in the midst of the worst financial crisis since the Great Depression and oversaw the almost doubling of U.S. public debt, has done better for investors than Robert Rubin while falling short of Henry Paulson.
Since Geithner assumed office in January 2009, returns on Treasuries have exceeded bonds of other countries by 0.3 percentage point on an annualized rate, according to Bank of America Merrill Lynch index data. That’s less than Paulson’s 7.5 percentage points. Under Rubin, returns on Treasuries lagged behind foreign issues by 1.6 points.
Bond yields and the government’s average cost to borrow have fallen to record lows, making it cheaper to finance the nation’s $1.3 trillion budget deficit than in all but six of the last 24 years. Geithner, who said he wouldn’t be asked to remain in his post should President Barack Obama win the November election, presided over the loss of the nation’s AAA credit rating and the growth of the nation’s debt to $10 trillion from $5.75 trillion.
“It’s been an environment where you don’t have a script to go by,” said Sean Simko, who manages $8 billion of bonds at SEI Investments Co. in Oaks, Pennsylvania, in a telephone interview Feb. 13. “He’s made and had to make many difficult choices throughout his tenure. The end result shows the U.S. has kept its integrity in the bond market.”
During Geithner’s term the U.S. has run the first three $1 trillion budget deficits in its history, contributing to the decision by Standard & Poor’s to lower the U.S. credit rating to AA+, the first time the U.S. hasn’t had the top credit rating. Borrowing rose to more than $2.1 trillion in each of the last three years from $922 billion in 2008.
The economy, recovering from the 18-month recession that ended in June 2009, is expected to grow 2.2 percent this year according to the median forecast of 89 economists in a Bloomberg News survey, below the average growth rate for the terms of Rubin from 1995 to 1999, Lawrence Summers from 1999 to 2001 and John Snow in 2003 to 2006.
“Over the last 25 years, I do not think any Secretary of the Treasury has faced the challenges that we’ve faced in the last four years,” Mary Miller, the Treasury Department’s assistant secretary for financial markets, said in a telephone interview Feb. 17. “We are doing everything we can to protect what is really a national resource, which is a very, very safe, liquid, deep market.”
Geithner’s Treasury has kept bond yields around record lows and demand for government securities at all time highs. His lengthening of the average maturity of U.S. debt to 62.8 months, the longest since 2002 under Paul O’Neill, may shore up credit quality and depress yields amid contained inflation, according to Steven Lear, deputy chief investment officer of fixed income at JP Morgan Asset Management, which oversees $150 billion in fixed income.
Investors have embraced longer-duration securities, with the 30-year yield at 3.17 percent, compared with an average of 4.57 percent during the past decade. They bid a record $3.04 per dollar of debt for each of the $2.135 trillion of notes and bonds sold at auction in 2011, government data show.
Treasuries returned 28.9 percent from July 2006 through January 2009, Paulson’s tenure under President George W. Bush, compared with 12.1 percent gains on non-U.S. sovereign debt. U.S. bonds gained 10.5 percent on an annualized basis during his term, the Bank of America indexes show.
U.S. government securities of all maturities returned 12 percent, or 3.8 percent on an annual basis, since 2009 as Geithner’s term started with the 10-year yield at 2.64 percent, only 0.61 percentage point above the then-record low. It fell to 1.67 percent last Sept. 23.
During the faster growth of Bill Clinton’s presidency, the 10-year yield fell 2 percentage points to 5.83 percent as all Treasuries appreciated 42.6 percent, or an annualized 8.3 percent from January 1995 through July 1999, compared with 52.5 percent returns for foreign debt. During Rubin’s tenure the economy grew at an average annualized rate of 3.9 percent. Lloyd Bentsen, Clinton’s first Treasury boss from January 1993 to December 1994 had the worst relative returns of any secretary in the past 24 years, at a minus 3.2 percent.
Yields on the benchmark 10-year note increased about two basis points, or 0.02 percentage point, to 2 percent last week, according to Bloomberg Bond Trader data. The price of the 2 percent security due in February 2022 fell 1/8, or $1.25 per $1,000 face value, to 99 31/32. The yield was 2.04 percent as of 9:21 a.m. in New York.
Geithner, 50, the last remaining member of the Obama administration’s original economic team, said during a Bloomberg Television interview on Jan. 25 that he doesn’t expect the president to ask him to stay in office if re-elected.
After earning a bachelor’s degree from Dartmouth College in Hanover, New Hampshire, and a master’s degree from Johns Hopkins University’s School of Advanced International Studies in Washington, Geithner worked for three years at a global consulting firm founded by Henry A. Kissinger before joining the Treasury in 1988, becoming Under Secretary in 1998. He was a director at the International Monetary Fund from 2001 to 2003 and then President of the Federal Reserve Bank of New York.
As clients pulled assets in a run from Bear Stearns Cos. in March 2008, Geithner’s New York Fed assumed $29 billion of risky mortgages held by the company to make it a palatable acquisition for JPMorgan Chase & Co. That September the Fed and Treasury were unable to arrange a rescue for Lehman Brothers Holdings Inc. and were unwilling to bail it out. The firm’s implosion froze U.S. credit markets.
Geithner handled the disbursement of more than half of the $700 billion Troubled Asset Relief Program passed in October 2008 and oversaw stress tests for the 14 largest U.S. banks.
“Geithner is a Treasury Secretary who’s had to carry baggage from his past roles,” said David Kotok, chairman and chief investment officer of Sarasota, Florida-based Cumberland Advisors Inc., which manages $1.5 billion, in a telephone interview Feb. 16. In his time at the New York Fed he contributed to “a ratcheting up of moral hazard” as the government bailed out failing enterprises, Kotok said.
U.S. public debt rose to $10.1 trillion in January 2012 from $5.75 trillion in January 2009, after rising from $4.28 trillion in July 2006 when Paulson took office. The debt declined under Rubin and Summers.
S&P cited rising debt and political gridlock in its downgrade message Aug. 5. “The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook,” the rating company said.
Treasuries rallied, repudiating the downgrade decision, with the 10-year note yield falling to 2.06 percent on Aug. 19 from 2.56 percent on Aug. 5.
“We have a deficit and a debt problem,” said Thomas Atteberry, who manages $4.5 billion in fixed income assets at First Pacific Advisors in Los Angeles, in a telephone interview Feb 16. “I’m disappointed that I have not heard him come forward and say look, this is a problem, we need to deal with it. We need to sit down and find a compromise plan, a compromise way to move things forward.”
Debt prices have been supported as the European debt crisis continues to worsen, and as the Fed has said it intends to hold short-term borrowing costs about zero through 2014. Investors have bid $3.17 for each of the $261 billion notes and bonds auctioned so far this year.
“There aren’t a lot of safe assets in the world,” said Thomas Girard, who helps manage $115 billion in fixed income at New York Life Investment Management in New York, in a telephone interview Feb. 15. “By default you’re getting people to buy your paper. Should Tim Geithner get credit for that? I’m not sure that he should.”
Interest payments will cost the government 3.1 percent of gross domestic product this year, according to Office of Management and Budget and International Monetary Fund data compiled by Bloomberg. That’s down from 4.8 percent in 1991, the highest in the past 50 years, during George H.W. Bush’s presidency. Since 1980, the only incumbent with a lower ratio than Obama was Bush in 2004.
The average yield of Bank of America Treasury index has fallen to 1.04 percent on Feb. 16, from 1.64 percent when Obama took office and from 5.27 percent when Paulson was sworn in. The average 10-year yield has been 3.03 percent under Geithner compared with 5 percent average since 1992.
“You have to put him in the context of the crisis that he’s faced,” said Michael Materasso, senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York, which oversees $320 billion of bonds, in a telephone interview Feb. 15. “The stress-testing of his capabilities has been continuous.”
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