The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.
The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H.W. Bush administration. The U.S. drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay 0% interest.
While Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, Treasuries due in 10 years or more returned 25.6% this year. The last time longer-maturity Treasuries returned as much as this year was in 1995, when they rallied 30.7%.
Treasuries were some of the best assets to own this year, returning 8.9%, compared with a decline of 8% for the Thomson Reuters/Jefferies CRB index of raw materials and a 0.6% gain in the S&P 500. Global sovereign debt and mortgage-backed securities rose 5.8%, and corporate bonds climbed 4.3%, according to Bank of America Merrill Lynch bond indexes.
Among those caught off-guard by the strong demand for Treasuries was PIMCO Co-Chief Investment Officer Bill Gross, who runs the PIMCO Total Return Fund, the world’s biggest bond mutual fund. In February, Mr. Gross had a net bet against Treasuries in the mutual fund, which has gained 3.3% this year.
Government and Treasury debt now make up 23% of the $241 billion Total Return Fund, according to data posted on Pacific Investment Management Co.’s website Dec. 9.
U.S. government debt will post its best five-year performance, gaining 39% from the start of 2007, since the 45% return from 1998 through 2002, a period that included the failure of Long-Term Capital Management, the collapse in Internet stocks and the Sept. 11 terror attacks.