By Cordell Eddings
(Bloomberg) — Never have Treasuries underperformed stocks as much as in 2009, and the world's biggest bond dealers say this year may offer more of the same as the U.S. economy recovers and unemployment abates.
After soaring 14 percent in 2008 when credit markets froze, Treasuries fell 3.72 percent on average last year. Investors shunned government debt while the U.S. raised a record $2.11 trillion selling securities amid signs that the worst slump since the 1930s had ended. The losses for Treasuries contrast with the Standard & Poor's 500's 23.5 percent gain.
Wall Street's 18 primary dealers, who correctly forecast yields would rise last year as bond prices fell, see borrowing costs increasing again as the Federal Reserve withdraws some of the funding that more than doubled the central bank's balance sheet to $2.24 trillion in the last two years. Bonds will also lag behind as the Treasury keeps up the pace of record debt sales to finance an unprecedented $1.4 trillion budget deficit.
"Treasuries will have a hard time," said Michael Pond, an interest-rate strategist in New York at Barclays Plc. "There is a tremendous amount of debt for the market to buy with the economy turning around and the Fed starting to pull back."
Barclays (BCS), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co.(JPM) and the other 15 primary dealers that trade directly with the central bank forecast the benchmark 10-year U.S. note yield will rise to 4.14 percent in 2010, after surging to 3.84 percent last week from 2.21 percent at the end of 2008, according to the median estimate in a survey by Bloomberg News.
At the same time, equity strategists at JPMorgan and Goldman Sachs who predicted stocks would rebound from their steepest plunge since the Great Depression now look for the S&P 500 to rally 9.8 percent this year.
Separate surveys show that economists and strategists anticipate higher yields in Germany, the U.K. and Japan, threatening to lead the global government debt market to its first annual loss since 1999 as measured by Bank of America Merrill Lynch indexes.
The debt market increasingly expects the economy has turned the corner. U.S. gross domestic product will expand 3.5 percent in 2010, the most since 3.6 percent in 2004, as consumers boost spending and companies increase investment and hiring, said Barclays economist Dean Maki, the most-accurate forecaster of GDP in a Bloomberg News survey. Barclays sees 10-year U.S. yields rising to 4.5 percent in 2010.
Fed Chairman Ben S. Bernanke, who in December 2008 slashed the central bank's target rate for overnight loans between banks to virtually zero, flooded the economy with more than $1 trillion in the largest monetary expansion in U.S. history. The Fed's balance sheet expanded from $867 billion in August 2007.
Central bankers are laying the foundation for withdrawing that money before it triggers inflation. The Fed will end most emergency lending programs and debt purchases by March because of "improvements in the functioning of financial markets" and stabilizing labor markets, the Federal Open Market Committee said on Dec. 16.
The Fed proposed a program on Dec. 28 to sell term deposits to banks to absorb some of the banking system's $1 trillion in excess reserves. Central bankers are considering a proposal to schedule limited sales of bonds from its balance sheet.
Policy makers will increase the benchmark rate as much as 0.75 percentage point by the end of the year from the current range of zero to 0.25 percent, according to the median of 66 forecasts compiled by Bloomberg.
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