U.S. Treasuries end 2011 as one of year's best investments

By Pallavi Gogoi, Associated Press Updated 17m ago

NEW YORK – Investors clamored for Treasuries in 2011, giving the market its best return since 2008, even after the U.S. government lost its sterling AAA credit rating. The turmoil in global markets only seemed to increase demand for Treasuries, which are still seen as the lowest-risk investments anywhere.

Compared to the U.S. stock market, where the broad Standard & Poor's 500 index ended the year flat, Treasuries soared 9.6% in 2011, according to a benchmark index from Bank of America/Merrill Lynch. That's the best return since 2008.

Investors flocked to the safety of U.S. Treasuries after being alarmed by worries that the euro, Europe's currency shared among 17 nations, would collapse because of enormous debt loads in many of the countries that use the euro.

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There are still worries that Greece, among other nations, could default on its debt, which would cause massive losses for large French and German banks that hold Greek bonds. Investors fear such an event could trigger global financial panic.

As the eurozone debt crisis intensified during the year, U.S. debt became the safest place to park cash for large investors.

"The U.S. downgrade was well overshadowed by concerns over eurozone risk," said Kim Rupert, managing director of global fixed income analysis at Action Economics. "After huge fluctuations in gold and other commodities, there aren't any other areas besides Treasuries to put your money and be assured you'll get it back."

Recent debt auctions by the U.S. government were met with record demand. That demand increased even more after the value of European government bonds fell, crushing the balance sheets of European banks. They were lining up with other investors from around the world to buy U.S. debt to shore up their balance sheets.

The intense buying sent the yield on the benchmark 10-year Treasury down to 1.67% in September, the lowest on record. On Friday, the 10-year note fell 15 cents for every $100 traded and closed out the year at a 1.88% yield.

Both Spain and Italy are scheduled to hold debt auctions in the coming weeks, which will be closely monitored. Both countries have had to pay high yields on new debt they've recently sold. Earlier this week, Italy paid 6.98% on a 10-year bond auction, dangerously close to the 7% threshold at which Greece and Portugal were forced to seek bailouts from their creditors.

That's not to say that 2012 will be a repeat performance for Treasuries. Rupert said the demand for U.S. Treasuries likely will remain strong until Europe convinces investors it is making enough progress toward resolving its debt problems.

"There's a real risk that a country defaults in the first half, which will have a domino effect and Treasury yields will hit fresh all-time lows," Rupert said. "But once that catharsis is over, expect large-scale selling."

But for now, Treasuries are the lowest-risk best bet in town. The 30-year bond yield finished 2011 at 2.89%, after starting the year at 4.5%.

The yield on the two-year note was unchanged at 0.27% while the yield on the three-month T-bill was 0.01%. Its discount wasn't available.

Trading was quiet on the last trading day of 2011. Markets will be closed Monday in observance of New Year's Day, which falls on Sunday.

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