US Treasuries are on track to beat the Standard & Poor's 500 Index for a second year. That hasn't happened since 1981 and 1982, when the economy was in recession.
Concern among some investors that the US might again be headed for recession has hurt stocks and driven up prices on government securities, which pay a fixed rate of return and typically rise in price when the Federal Reserve is lowering interest rates.
"People are finally figuring out that they can lose money in their 401(k) account, so they're turning to bonds," said Peter McTeague, a bond strategist at Greenwich Capital Markets. "The game is over" for stocks, he said.
Government securities have returned 5.9 percent this year including reinvested interest, according to a Merrill Lynch & Co.
index of bonds and notes. That compares with a -13.8 percent return for the S&P 500, including reinvested dividends. Treasuries returned 13.3 percent last year; the S&P -9.1 percent.
"Bonds tend to beat other asset classes, including stocks, at the end of a business cycle, through a recession and back out on the other side," said William Dawson, chief investment officer for fixed-income investments at Federated Investors in Pittsburgh, whose US$194 million Total Return Bond Fund has returned 6.4 percent year-to-date.
Business investment in equipment last quarter had the biggest drop since 1980, when the economy fell into the first of two recessions during the decade. After returning 9.9 percent in 1981, Treasuries soared a year later, returning 28 percent. Stocks trailed bonds for both years, with the S&P returning -4.9 percent and 20.4 percent, respectively.
The comparison between the current US economy and the one in 1981 and 1982 only goes so far. Inflation remains well-contained now, allowing the Fed to lower interest rates to spur growth.
It soared between 1979 and 1981, forcing the government to pay a record 15 3/4 percent to sell 20-year notes. The Fed's interest-rate increases to end inflation helped bring on the recession then, while falling corporate earnings and a slowdown in consumer spending threatens to send the economy there now, analysts say.
Companies such as Gateway Inc and Ford Motor Co have fired thousands of employees in an attempt to preserve profits.
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