Treasuries love affair endures after first loss since 2009

Fed Taper

The Fed announced plans on Dec. 18 to cut its monthly bond purchases to $75 billion from $85 billion. Based on 41 economists surveyed by Bloomberg on Dec. 19, the central bank will pare its purchases by $10 billion in each of the next seven meetings before ending the program in December 2014 as the economy strengthens and joblessness decreases.

The estimates indicate the Fed will purchase $260 billion of Treasuries next year, a 52% decrease from this year’s total, data compiled by Bloomberg show.

Debt investors are still clamoring for Treasuries even as they are poised to lose money this year for the only the fourth time since 1978, according to index data compiled by Bank of America Merrill Lynch.

U.S. bonds have slumped 3.4% in 2013, which would be the first decline since Treasuries posted a record 3.7% drop in 2009. Treasuries due in 10 years or more have plummeted more than 12% this year, the deepest loss among the 144 government bond indexes globally compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Economic Growth

Yields on the benchmark 10-year note declined three basis points, or 0.03 percentage point, to 2.97% as of 11:28 a.m. in New York, Bloomberg Bond Trader prices show. The price of the 2.75% note due November 2023 was at 98 1/8.

Rather than a referendum on America’s credit quality, the bond losses reflect greater confidence in the U.S.-led global recovery and suggest the appeal of Treasuries will diminish further as the Fed scales back, according to Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union.

The economies of the U.S., Europe and Japan are all forecast to expand next year, the first time that’s happened since 2010, according to economists surveyed by Bloomberg. The U.S. economy will probably grow 2.6% in 2014 and accelerate 3% the following year, which would be the fastest in a decade, data compiled by Bloomberg show.

Dollar Strength

“Global markets are undergoing healing and repair,” Sullivan said in a Dec. 17 telephone interview from New York. “The risk of global contagion emanating from a collapse of one kind or another, it’s not zero but it’s receded quite a bit.”

Sullivan said the firm holds a smaller percentage of Treasuries than their allocation in benchmark indexes.

U.S. government debt is suffering the worst returns versus stocks on record this year. With Standard & Poor’s 500 Index gaining 29.1% and Treasuries posting a decline, the 32.5 percentage point gap is the most since at least 1978, data compiled by Bank of America and Bloomberg show.

The strength of the dollar may help to bolster demand from overseas debt investors, who own about 50% of the U.S. government’s debt obligations. The dollar has gained this year versus 10 of its 16 major currencies tracked by Bloomberg, including the yen, the Norwegian krone, the Brazilian real and the Canadian dollar.

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