Treasuries beat rest of bonds as mortgages show 1% growth

June 25 (Bloomberg) -- Treasuries are beating all other U.S. fixed-income securities for the first time in three quarters as investors around the world seek the safest assets.

U.S. government debt has gained 2.9 percent since March, while corporate bonds returned 1.9 percent, mortgages rose 1 percent and municipal bonds increased 1.8 percent, according to Bank of America Merrill Lynch index data. The combination of Europe’s debt crisis, China’s slowdown and record stimulus by the Federal Reserve means Treasuries are outperforming the global bond market by 1.3 percentage points, after lagging behind by 2.4 percentage points in the previous quarter.

The returns show that even after the Fed kept the economy growing for 11-straight quarters by buying $2.3 trillion of assets and continuing to swap $667 billion of short-term debt into longer-term securities, bond investors expect the economy will remain sluggish. The extra yield investors demand to own anything else besides Treasuries corresponds to an expansion of less than 1 percent, according to Barclays Plc index data compiled by ING Investment Management.

“With the weight of everything, there are not enough points of light and promise out there to get you to say ‘I’m going to go for that risk-based asset,’” Mitchell Stapley, chief fixed-income officer at Grand Rapids, Michigan-based Fifth Third Asset Management, which oversees $15 billion in assets, said in a June 22 telephone interview. “You’re going to sleep less badly by buying a U.S. Treasury security.”

Record Low

Yields on benchmark 10-year notes fell to a record low of 1.44 percent on June 1, after the economy added fewer jobs in May than analysts forecast, suggesting the European sovereign- debt crisis is restraining U.S. growth.

The 1.75 percent security due in May 2022 fell 28/32, or $8.75 per $1,000 face value, to 100 21/32 last week, according to Bloomberg Bond Trader prices. The yield rose 10 basis points, or 0.1 percentage point, to 1.68 percent. A year earlier, the yield on the benchmark security for everything from consumer loans to corporate borrowing was 2.98 percent.

The yield dropped six basis points to 1.61 percent as of 8:55 a.m. New York time.

Treasuries gained 0.87 percent this quarter through June 21 on a risk-adjusted basis, which takes into account volatility, while securities from government bonds to mortgages globally have returned 0.28 percent, according to Bank of America Merrill Lynch index data.

‘Major Shortage’

There is a “major shortage of safe assets in the global financial system,” according to a report yesterday from the Bank for International Settlements in Basel, Switzerland.

Debt from companies and municipalities to securities created by packaging mortgages and other assets gained less, in part because the $10.5 trillion Treasury market is the most liquid pool of securities in the world, so prices respond to new information the fastest. Primary dealers traded $504 billion of U.S. government debt the week that ended June 13, according to Fed data. That compares with $93 billion of corporate bonds during the same period.

Average yields in the $5.13 trillion U.S. corporate bond market declined to 4.28 percent as of June 22 from 4.81 percent at the end of last year, according to Bank of America Merrill Lynch index data. They’ve fallen to 1.9 percent from 1.98 percent in the $5 trillion mortgage market.

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