Bonds beat stocks over 30 years for first time since 1861

The biggest bond gains in almost a decade have pushed the 30-year returns on long-term Treasuries above those of stocks — the first time that’s happened since before the Civil War.

Fixed-income investments had advanced 6.25% year-to-date through Oct. 28, almost triple the 2.18% rise in the S&P 500, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63% this year, the most since 2002, the data show. Long-term government bonds gained 11.5% a year on average over the 30-year period through September, beating the 10.8% increase in the S&P 500, said Jim Bianco, president of Bianco Research LLC.

A combination of a core U.S. inflation rate that has averaged 1.5% this year, the Federal Reserve’s decision to keep its target interest rate for overnight loans between banks near zero through 2013, slower economic growth and the highest savings rate since the global credit crisis have made bonds the best assets to own this year.

U.S. government debt is up 7.23% this year, according to Bank of America Merrill Lynch’s U.S. Master Treasury Index. Municipal securities have returned 8.17%, corporate notes have gained 6.24% and mortgage bonds 5.11%. The S&P GSCI index of 24 commodities has returned 0.25%.

Naysayers continue to predict the collapse of the bond market.

“The rally in bonds is a once-in-a-millennium event,” said Jeremy Siegel, a finance professor at the Wharton School at the University of Pennsylvania.

The shift to debt wasn’t anticipated by Bill Gross, who as co-chief investment officer of Pacific Investment Management Co. LLC runs the world’s biggest bond fund. His $242 billion Total Return Fund (PTTRX), which unloaded Treasuries in February before the rally, has gained 2.55% this year, putting it in the bottom 18th percentile of its category, according to Bloomberg data.

WHAT WENT WRONG

What bears didn’t expect, economists and investment managers said, was that Americans would continue to pare debt and boost savings. Much of that money found its way into the fixed-income markets as banks and investors sought high-quality debt.

“It’s hard to envision a scenario where we see significantly better than 2% growth, with increased fiscal austerity and head winds from the leverage bubble and persistent unemployment,” said Rick Rieder, who oversees $620 billion as chief investment officer of fundamental fixed income at BlackRock Inc., the world’s largest money manager at $3.45 trillion.

The U.S. savings rate has tripled to 3.6% since 2005 and has averaged 5.1% since the depth of the financial crisis in December 2008, compared with 3.1% for the previous 10 years, according to government data. Debt mutual funds have attracted $789.4 billion since 2008, compared with a $341 billion drop in equity funds, according to data compiled by Bloomberg and the Investment Company Institute.

Banks, still trying to rebuild their balance sheets after taking more than $2 trillion in write-downs and losses since the start of 2007, have boosted holdings of Treasuries and government-backed mortgage securities to $1.68 trillion, from $1.62 trillion last December, according to the Fed.

Money has poured into Treasuries even though the U.S. budget deficit totaled $1.4 trillion in fiscal 2009, $1.29 trillion in fiscal 2010 and $1.3 trillion in fiscal 2011, ended Sept. 30.

FEBRUARY TAKEOFF

Since February, Treasuries have rallied 7.99% and the dollar has gained 3.2%, beating 14 of its 16 most actively traded peers, according to Bank of America Merrill Lynch indexes and Bloomberg data.

Fed policymakers, who met last week, signaled that they are considering more measures to boost the economy, after holding the target rate for overnight loans between banks at zero to 0.25% since December 2008 and expanding its balance sheet to a record $2.88 trillion.

Janet Yellen, the Fed’s vice chairman, said Oct. 21 that a third round of large-scale securities purchases might become warranted. Last month, Fed policymakers said they would replace $400 billion of short-term debt with longer-term Treasuries in an effort to contain borrowing costs.

“The Fed’s hope is that by pushing down Treasury rates, all other rates will follow,” said Jay Mueller, who manages about $3 billion of bonds at Wells Capital Management Inc.