The U.S. government securities (GS) recorded its worst year since 1978, after the government expedite the issuance of new debt to help restore the economy from the deepest recession in six decades. According to the index of Bank of America Merrill Lynch government securities have lost 3.6 percent this year – the worst performance for at least 1978, when he began calculating the index. Holders of U.S. debt, however, have achieved returns of 81% in the last decade, according to this index, while the index for the same period Standard & Poor’s 500, including dividends and has lost 8 percent of its value. President Obama takes unprecedented amounts of funding for different programs. Only last week the Treasury sells government bonds worth 118 billion dollars. The issued government debt outstanding reached a record 7.17 trillion. dollars in November after the end of last year was a level of 5.80 trillion. “This is the largest increase in budget deficit for one year, excluding periods of wars and depressions. Realistic expectations for economic recovery and the accompanying increase in interest rates increased the yield of government securities, which automatically means lower prices, “says Christian Kari, a senior analyst at Societe Generale SA, Tokyo. According to him, prices could fall even more.
Since the beginning of the year the yield on the basic 10-year government bonds rose by 1.59 points to 3.80 percent in early London trading today. “The volume of supply will remain a problem next year,” said David Shnautts strategist at Commerzbank AG, Frankfurt. “Despite the large supply and the prospects for economic recovery, however, expect the yield on government securities to be structurally lower, as banks are likely to increase their investments in safe and liquid assets such as government securities,” he finishes. Yield spread between short-and long-term government securities barometer for the economy, extending a record earlier this month after investors agreed that the emerging recovery would cause inflation and reduce the demand for government debt, pushing the yield on long-term bonds. The difference in yield between 2-year and 10-year bonds reached a record 2.88 percentage points on December 22 by only 1.45 percentage points at the beginning of the year. Spread is currently at a level of 2.71 points. Spread between 10-year government bonds and government bond inflation-protected with the same maturity rose to 2.43 percentage points yesterday – the highest level since July 2008 onwards. This spread is a measure of inflation expectations and shows that the recovering economy can change attitudes and lead to even higher yield (respectively, lower prices) of government bonds.