NEW YORK - 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 Treasuries 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, Tenn., 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.
Treasuries 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 at 10:24 a.m. London time today.
Yields on Treasuries 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 Treasuries 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.