Even though the national debt has soared, borrowing costs have tumbled as investors sought a haven from the turmoil.
Treasury 10-year yields fell 11 basis points last week, or 0.11 percentage point, to 1.75 percent. That’s down from more than 5 percent in mid-2007. The price of the benchmark 1.625 percent note due August 2022 rose one point, or $10 per $1,000 face amount, to 98 27/32, Bloomberg Bond Trader prices show.
The yield dropped three basis points to 1.72 percent as of 9:43 a.m. in New York.
“There’s that hackneyed phrase that people are concerned about return of principal, not return on principal,” Robert Tipp, the chief investment strategist for the public fixed- income division of Newark, New Jersey-based Prudential Financial Inc., said in a Sept. 19 telephone interview. The division oversees about $350 billion.
Investors have put an average of $16.6 billion per month from September 2011 through July into mutual funds that invest in taxable bonds, according to data from the Investment Company Institute released Sept. 12. That compares with an average monthly outflow of $10.9 billion from stock funds.
Households increased Treasuries holdings by a record 51 percent in the first half of the year to $878 billion from the end of 2011, according to Fed data released Sept. 20. Mutual funds raised their share by 9.3 percent to $415 billion, while private pensions added 4 percent to $454 billion.
“One of the biggest risks out there is market risk that interest rates will start rising,” Kathleen Gaffney, a money manager at Loomis Sayles & Co., which oversees $171.4 billion, said Sept. 17 in an interview in New York. “You get any kind of traction going on in the economy and those rates are going to move very sharply.”
Gaffney is a co-manager of the $22.4 billion Loomis Sayles Bond Fund, which has beaten 97 percent of its peers this year and doesn’t own Treasuries. An investment of $10 million in the current 10-year note would incur a loss of $760,000 should the yield rise to its average during the past five years of 3.07 percent by the end of 2013, Bloomberg data show.
The securities will yield 1.75 percent at the end of this year and may rise to 2 percent by mid-2013, according to the median estimate of 76 economists surveyed by Bloomberg. The poll for May showed yields climbing to 2.7 percent by the mid-2013.
Retail investors might be chasing last year’s returns, said Robert Mecca of Robert A. Mecca & Associates LLC in Hoffman Estates, Illinois. A wealth adviser for about 30 years, Mecca described his clients as ranging from ditch diggers to dentists.
U.S. government debt returned 9.8 percent in 2011, the most in three years, according to Bank of America Merrill Lynch index data. The Standard & Poor’s 500 Index of stocks gained 2.1 percent including reinvested dividends. This year the performance has reversed, with Treasuries returning 1.6 percent and the S&P 500 gaining 18 percent.
“It’s like driving a car by looking through the rearview mirror,” Mecca said in a Sept. 18 telephone interview. “If people are saying, ‘I really am a Treasury bond person, I don’t like what’s going on the world,’ then we say, ‘OK, look into some high-rated corporate bonds.’”