Fed’s Bernanke Vindicated by ‘Monster’ Bond Rally

Return of 28% for Treasuries so far in 2011 is biggest gain since 1995

Fed Chairman Ben Bernanke. (Photo: AP) Fed Chairman Ben Bernanke. (Photo: AP)

Call Ben Bernanke crazy, but if he is, bond market returns mean it’s like a fox. Beating even the 24.4% gain in 2008, actions taken by the Federal Reserve have resulted in the biggest bond rally since the mid-90s.

“Betting on Ben Bernanke has been the most profitable trade for government bond investors in 16 years, defying lawmakers in the United States and abroad who said the Federal Reserve chairman’s policies would lead to runaway inflation and the dollar’s debasement,” Bloomberg reported Monday, noting in particular the outperformance of bonds with maturities of 10 years or longer. “Not since 1995, when the securities soared 30.7%, have investors done so well owning longer-dated U.S. government debt.”

In the wake of “Operation Twist” announced last week, in which the Federal Reserve said they would buy $400 billion of longer-term U.S. Treasury securities to put downward pressure on longer-term interest rates, yields have fallen to record lows.

Mitchell Stapley, chief fixed-income officer for Fifth Third Asset Management, told Bloomberg that bonds were producing “monster” gains.

“I’m dealing with a Federal Reserve with an unlimited balance sheet that is desperately looking for something to do to revive the economy,” he said

The news service notes that with the U.S. budget deficit exceeding $1 trillion, “this year’s rally caught investors by surprise. The lowest forecast among 71 economists and strategists surveyed by Bloomberg News from Jan. 3 to Jan. 11 was for 10-year yields to end this quarter at 2.35%, and the median estimate was 3.63%. They closed at 1.83% last week.”

“The flight-to-safety bid is still fierce,” Wan-Chong Kung, a bond fund manager at Nuveen Asset Management, told Bloomberg. “The fundamentals of very modest growth, modest inflation and a Fed that wants to commit to low rates for a long time continue to be supportive.”

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