Longest decline in world bonds since 2008 masks junk surge amid recovery

NEW YORK, Feb 28 (Bloomberg): Bond market investors are showing the greatest confidence in global economic growth since credit markets crashed three years ago. Yields on debt securities are rising for a fourth month as prices fall, the longest stretch since June 2008, according to Bank of America Merrill Lynch's Global Broad Market Index, which tracks the performance of more than 19,000 securities valued at about $39 trillion. While the highest-rated debt, from US Treasuries to Microsoft Corp debentures, are falling, the riskiest company notes are returning the most in eight years. "We've just experienced the first several months of a bear market in bonds," said Michael Hyman, head of investment-grade credit in Atlanta at ING Investment Management, which oversees about $518 billion. While bonds rallied last week as turmoil in the Middle East and North Africa spread, debt prices have fallen 3.54 per cent since August as the MSCI World Index of stocks surged 24 per cent. Consumer confidence in the US climbed during the week ended Feb 20 to the highest level since April 2008. Manufacturing is expanding worldwide. The Institute for Supply Management's factory index for the US rose to 60.8 in January, the highest level since May 2004. China said last month that industrial production rose 13.5 per cent in 2010, while growth in Europe's service and manufacturing industries accelerated to the fastest pace in more than four years this month, led by stronger output in Germany. Market interest rates are the highest in more than a year, rising to 3 per cent from last year's low of 2.14 per cent on Aug 31, the Broad Market Index shows. Sovereign debt, considered the least at risk of default, has performed the worst, losing 2.99 per cent after reinvested interest since August. US Treasuries are down 2.88 per cent. Bonds issued in September by Redmond, Washington-based Microsoft at some of the lowest borrowing costs on record have tumbled, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield on the largest software maker's $1 billion of 3 per cent debt due October 2020 rose to 3.88 per cent last week from about 3 per cent when they were issued. The bond market exception has been high-yield debt. Junk bonds, rated below Baa3 by Moody's Investors Service and less than BBB- by Standard & Poor's, have returned 3.48 per cent this year, the best start since gaining 3.89 per cent at the same point in 2003, Bank of America Merrill Lynch indexes show. US junk yield fell to a record low 7.29 per cent on Feb 22. Investors see less risk of defaults because the global economy is forecast to expand 4.22 per cent this year and 4.54 per cent in 2012, according to International Monetary Fund data, after shrinking 0.58 per cent in 2009. "It's a favourable outlook for the global economy," said John Lonski, the chief economist at Moody's Capital Markets Group in New York. Anything better than about 3 per cent is healthy, he said. Bond returns globally have fallen to a 0.14-per cent loss this year, including a 0.22-per cent decline for Treasuries and a drop of 0.49 per cent for sovereign debt, according to Bank of America Merrill Lynch index data. Losses were tempered this month as spreading political tension in the Middle East led investors to seek the safety of government debt. Before last week, bonds were headed for a sixth-straight monthly loss, the longest stretch since the Global Broad Market Index was created in 1997. Now, they're up 0.13 per cent for February. Protests in Egypt, Bahrain, Libya and Tunisia drove oil above $100 a barrel in New York for the first time since October 2008, raising concern that rising commodity prices would curb consumer spending and add to inflation at a time when unemployment in the US is 9 per cent. JPMorgan Chase & Co cut its first-quarter US economic growth estimate to an annual rate of 3.5 per cent from 4 per cent, according to chief US economist Michael Feroli. "Consumers stumbled a bit to start the year," Feroli wrote in a note e-mailed to clients on Feb 25. "The recent rise in energy prices poses a notable headwind." The US government said on Feb 25 that gross domestic product grew at a 2.8-per cent annual rate in the fourth quarter, less than the 3.2 per cent it originally estimated, as state and local governments made deeper cuts in spending. The Federal Reserve "is on hold, unemployment is high and inflation is low," said Matthew Marra, a money manager at New York-based BlackRock Inc, the world's largest asset manager with about $3.45 trillion. "The things you would expect to cause dramatically higher interest rates are not in place today." Global bond yields are still below the average of about 4.15 per cent since the index started in 1997. The index was at 5.05 per cent at the end of 2000, and 5.56 per cent in December 1996 when the firm, then Merrill Lynch & Co, began tracking the data. An expanding spread between Treasury yields and those on government debt tied to the consumer price index shows traders anticipate economic growth won't spark runaway inflation even as global energy and food prices soar. An index of 55 food commodities climbed 3.4 per cent in January from a month earlier to a record high 231 points, the United Nations' Food and Agriculture Organization said in a Feb 3 report. The 10-year break-even rate is 2.41 percentage points, in line with the average for the five years before credit markets seized up in mid-2008. Treasury 10-year note yields fell from a high of about 5.3 per cent to a low of about 3.3 per cent over that period. The yield on the benchmark 10-year security fell 17 basis points last week to 3.41 per cent, according to BGCantor Market Data. The 3.625 per cent note due February 2021 rose to 101 24/32. The yield was 3.40 per cent today as of 2 pm in Tokyo. The outlook is bright enough that the Federal Reserve may be able to reduce stimulating the economy, said St Louis Fed Bank President James Bullard. The central bank voted in November to buy $600 billion in Treasuries through June to boost employment and spur inflation. "The natural debate now is whether to complete the program, or to taper off to a somewhat lower level of asset purchases," Bullard said Feb 24 in a speech in Bowling Green, Kentucky. "The economic outlook has improved since the program was announced." Investors pumped $47 billion into equity funds in the US, Europe and Japan this year after pulling $17 billion in 2010 and $28 billion in 2009, EPFR Global said Feb 18 in a statement. The MSCI All Country World Index of stocks has climbed 3.79 per cent with dividends reinvested this year as the Standard & Poor's 500 Index rose 5.29 per cent and the Nikkei-225 Stock Average gained 2.98 per cent.