The bear market in bonds is being delayed by Americans socking away money at 50 times the rate at which they take on debt to buy houses, cars and other items.
The amount U.S. households have in bank deposits, savings bonds, fixed-income mutual-funds and municipal securities increased $500 billion last year, equaling the most since 2007, according to FTN Financial, based on Federal Reserve data, while net household debt increased $10 billion, the least since 2005, as the economy grows slower than historically.
Consumers have kept up the trend into 2013, according to strategists at FTN, helping to prevent a selloff in Treasurys and other debt assets after average annual gains of 6.3 percent since 2008. That helps explain while even as Congress debates ways to reduce record budget deficits exceeding $1 trillion, politicians such as President Barack Obama to House Speaker John Boehner say the U.S. doesn’t face an immediate debt crisis.
“The economy has been cruising in second gear,” Jim Vogel, a debt strategist at FTN Financial in Memphis, Tennessee, said in a March 21 telephone interview. “Leverage, however is still in neutral. Until it engages, a lot has to go right for U.S. economic growth to hit third gear. Investors remain committed to fixed-income.”
FTN Financial has correctly been less bearish on bonds than the consensus. The firm predicted at the start of 2012 that the yield on the 10-year Treasury note would end the year at 2.1 percent, below the median estimate of 2.5 percent in a Bloomberg News survey of economists. The yield finished at 1.76 percent.
Treasurys rallied in four of the past five weeks. They rose last week as efforts to avert a banking crisis in Cyprus boosted demand for safe assets and as Fed Chairman Ben S. Bernanke said more gains in the labor market are needed for the central bank to consider reducing its record monetary easing.
“Obviously, there has been improvement,” Bernanke said at a March 20 news conference in Washington after the Fed decided to leave the pace of bond purchases unchanged at $85 billion a month. “One thing we would need is to make sure that this is not a temporary improvement.”
Treasury 10-year yields fell six basis points last week, or 0.06 percentage point, to 1.93 percent in New York. The price of the benchmark 2 percent note due February 2023 rose 18/32, or $5.63 per $1,000 face amount, to 100 21/32, according to Bloomberg Bond Trader prices. The 10-year rate was 1.96 percent Monday as of 1:15 p.m. in Tokyo.
Yields on Treasurys of all maturities ended last week at an average 1.03 percent, down from last year’s high of 1.35 percent in March 2012, and as high as 2.19 percent in 2011, according to Bank of America Merrill Lynch indexes.
Record demand for Treasurys has helped the U.S. finance a debt load that has risen to $16.7 trillion. The amount of interest expense dropped to $359.8 billion in the fiscal year ending September 2012, the lowest since 2005, and representing 1.4 percent of gross domestic product, or less than half the level in 1989 when Ronald Reagan left the White House.
“We do not have an immediate debt crisis, but we all know that we have one looming,” Boehner, a Republican from Ohio, said March 17 on ABC’s ‘This Week.’ “We have one looming because we have entitlement programs that are not sustainable in their current form. They’re going to go bankrupt.”
Debt has dominated the Washington budget debate, with federal deficits topping $1 trillion for four years before falling to a projected $845 billion in fiscal 2012 ending Sept. 30. Congress mandated $85 billion in across-the-board spending cuts this year, which may trim economic growth by 0.6 percent while costing 750,000 jobs, according to the nonpartisan Congressional Budget Office.
Obama, a Democrat, has opposed the so-called sequestration and Senate Democrats have proposed a budget aimed at replacing the cuts that began March 1 with a combination of tax increases and spending reductions.
BlackRock Inc., whose $3.79 trillion of assets on Dec. 31 made it the world’s biggest asset manager, sees little reason for small investors to buy bonds. Investors pulled $156 billion from domestic stock funds last year as they loaded up on bonds, according to the Investment Company Institute.
“Owning a bond that’s paying you 1 or 2 or 3 percent just is not going to provide you with the nest egg out 20, 30 years,” Laurence D. Fink, chief executive officer of BlackRock Inc., said in a Bloomberg Television interview in Hong Kong on March 20. “They are frightened about all the noise and so they are putting a huge allocation of their retirement into bonds.”
Signs of economic strength are emerging. The Standard & Poor’s 500 Index of stocks has gained 9.7 percent this year, including reinvested dividends, while the Dow Jones Industrial Average reached a record 14,546.82 on March 20.
Builders began work on more houses in February and permits for future construction climbed to the highest level in almost five years. Housing starts climbed by 0.8 percent last month to a 917,000 annualized pace, the Commerce Department reported March 19 in Washington, while permits rose 4.6 percent to a 946,000 rate, the most since June 2008.
“The economy will continue to improve as spending picks up given the steady improvement in the labor market,” Carl Riccadonna, senior U.S. economist at Deutsche Bank AG in New York, said in a telephone interview March 20. “The end result of that is an increase in interest rates.”
Riccadonna forecasts 10-year Treasury yields will rise to 2.75 percent by year-end, above analysts’ median estimate of 2.25 percent, according to a Bloomberg News survey.
Consumers pulled back after the October 2008 collapse of Lehman Brothers Holdings Inc. froze financial markets. Home- mortgage debt fell to $9.4 trillion at the end of 2012 from a record $10.6 trillion in 2008, reflecting foreclosures, lower property prices and tighter credit, according to Fed data.
Instead households, which include individuals, domestic hedge funds, private equity funds, and personal trusts, funneled $1.04 trillion into Treasurys last year, compared with $648 billion in 2011, according to Fed flow of funds data.
Deposits at U.S. financial institutions exceeded loans by $2.03 trillion as of March 6. In the month before Lehman’s bankruptcy loans exceeded deposits by $205 billion.
Banks are also seeking safety, buying $180 billion of Treasurys and securities of agencies in 2012, up from $60 billion the year before and the most since 2010, according to data compiled by Bloomberg. That brought their total holdings to a record $1.88 trillion, up from $1.08 trillion in 2009.
“We’ve seen many forms of this grand increase in deposits, even as interest rates are low and people are not earning much,” David Ader, the head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut, said in a telephone interview March 21. “If there isn’t much loan demand, it’s going to stay this way for a while.”
Ader forecast 10-year Treasury yields will rise to 2.5 percent by year-end.
While the Fed has injected more than $2.5 trillion into the economy since 2008 to revive growth, GDP is forecast to grow 1.9 percent this year, below the 2.5 percent average the past two decades, according to the median estimate in a Bloomberg News survey of 93 economists.
Consumer confidence unexpectedly slumped in March, with the Thomson Reuters/University of Michigan preliminary sentiment index for March falling to 71.8, the lowest level since December 2011, from 77.6 in February. The average number of days needed to sell new cars and trucks vehicles rose to 64 in February, the most since August 2009, Bloomberg Industries said March 13.
The Fed said last week it will keep its benchmark interest rate in a range of zero to 0.25 percent until unemployment falls below 6.5 percent while inflation remains less than 2.5 percent. The jobless rate was 7.7 percent in February.
“The reasons we have slow and not robust growth is because the household sector is being very cautious in how they are increasing their spending,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 21 primary dealers that trade with the Fed. “That will keep a lid on economic activity,” said Jersey, who sees 10-year Treasury yields ending the year at 2 percent.
U.S. investors have remained risk-averse, favoring bond over stock funds. In February, they placed more than $18 billion into mutual funds of taxable debt of all types, including Treasurys, compared with $2.41 billion for domestic equity, according to the Investment Company Institute.
Vanguard Group Inc., the largest mutual-fund manager in the U.S., and the biggest private owner of U.S. debt, has boosted its holdings of Treasurys by $76 billion since July to $224.3 billion as of December, data compiled by Bloomberg show.
“It’s really wages and employment that drive consumer confidence and without seeing a significant improvement on the wage front or employment, it will keep consumer spending somewhat muted and that’s really what’s holding back the economy and bond yields,” Mark MacQueen, a partner and money manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $11 billion, said in a telephone interview on March 21.
MacQueen, who forecasts the yield on the 10-year note will end 2013 at 2.25 percent, is buying investment-grade corporate and agency mortgage-backed securities.
© Copyright 2015 Bloomberg News. All rights reserved.