US bonds beat stocks in 30-year returns
Updated: 2011-11-01 07:36
NEW YORK - The biggest bond gains in almost a decade have pushed returns on US Treasuries above stocks over the past 30 years, the first time that's happened since before the US Civil War.
Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.
Investors seeking safety following the collapse of Lehman Brothers Holdings Inc in September 2008 fueled demand for debt and upended the notion that equities rising along with corporate growth must offer the best gains.
The combination of a core US inflation rate that has averaged 1.5 percent this year, the US 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.
"The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong," Bianco said. "It's such an ingrained idea in everyone's head that such low yields should be shunned in favor of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off."
Stocks have risen more than bonds over every 30-year period from 1861 until now, according to Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School in Philadelphia.
US government debt is up 7.23 percent this year, according to Bank of America Merrill Lynch's US Master Treasury index. Municipal securities have returned 8.17 percent, corporate notes have gained 6.24 percent and mortgage bonds have risen 5.11 percent. The S&P GSCI index of 24 commodities has returned 0.25 percent.
The reluctance to purchase debt continues. Leon Cooperman, chairman of $3.5 billion hedge fund Omega Advisors Inc, said in a presentation at the Value Investing Congress in New York on Oct 18 that he "wouldn't be caught dead owning a US government bond".
"It's hard to envision a scenario where we see significantly better than 2 percent growth, with increased fiscal austerity and headwinds from the leverage bubble and persistent unemployment," said Rick Rieder, who oversees $620 billion as chief investment officer of fundamental fixed income at New York-based Blackrock Inc.
The bond market posted its first 30-year gain over the stock market in more than a century during the period ended Sept 30. The last time was in 1861, leading into the US Civil War, according to Siegel.
"The rally in bonds is a once in a millennium event, but it's absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform," he said. "If you missed the rally in bonds, well, then that's it."