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BY SHAVASB BOHDJALIAN
US Treasuries delivered the best return in 2011, with the 10-year benchmark up 17% on the year, well above the 10% return for gold and 8% for oil, while bonds in Germany and the UK also delivered a fantastic return. The euro, threatened by a growing credit crisis in Europe, hit a 10-year low against the yen and ended 3.3% down against the dollar in 2011, according to Reuters data and analysis.
World stocks lost more than 9% for the year, although a steady flow of encouraging U.S. economic data allowed the S&P 500 to erase losses and close practically where it started in 2011.
The performance of US Treasuries was astonishing if one considers that during 2011, the US lost its AAA rating on the back of rising deficits and its inability to address the situation. Even Bill Gross, the manager of PIMCO, the world’s largest bond fund was forced to abandon huge bets against US bonds halfway into 2011 after it became obvious that the rally had more room to continue.
The US 10-year bond yield started at around 3.3% in 2011 and ended at 1.88%. Many fund managers say the US bond market is the last bubble which will eventually crack, arguing that it does not make sense for the US bonds to continue to rally at a time when total debt has increased to $15 trillion, or 100% of GDP with the country continuing to run massive deficits.
Others however, point to Japanese bond yields as a guide as to where the current rally in US bonds is heading. The Japanese 10-year bond yield is currently 1%. The bulls argue that with the European debt crisis showing no signs of ending soon, the US is the only “safe” and liquid place where major international investors can park their money. They further argue that with the Fed having pledged that it will not raise interest rates soon and with inflation under control, monetary policy will remain “loose” and thus they are justified to remain firmly invested in bonds.
The same arguments are cited by gold bugs who insist that the yellow metal will continue to outshine and deliver another fantastic return in 2012. Gold increased 10.2% in 2011 but is currently down 19% from its peak of $1920 an ounce at $1565 an ounce. Gold's strong performance came despite a sell-off in the past few weeks, when tight liquidity in the euro zone forced many investors to sell the metal to meet their financial obligations.
U.S. crude oil prices ended the year with gains of 8.2%, at $98.83 per barrel, as instability in oil producing countries eclipsed concerns about Europe's crisis.
The euro hit a 10-year low versus the yen and ended 2011 on a weak note after breaking below key support levels, and it looked set to remain under pressure in 2012 from Europe's debt crisis.
Some analysts said the currency could drop as low as $1.20 by the end of 2012 in the absence of a comprehensive policy response to the crisis, potentially moving towards its 2010 low of $1.1876.
Analysts expect euro zone funding pressures to intensify in early 2012, with EUR230 bln of bank bonds, up to EUR 300 bln in government bonds, and more than EUR 200 bln in collateralised debt maturing in the first quarter, according to Reuters.
The first quarter funding needs of EUR 750 bln in Europe far exceed the EUR 500 bln in three-year loans that the ECB gave to European banks in late December, which many policymakers hope the banks will use to buy Italian and Spanish sovereign debt. There is a good chance that the ECB will be obliged to offer new “soft” loans to help EU member states rollover their maturing debt, which according to many analysts is another form of Quantitative Easing (QE) in disguise that helps explain why the euro remains under selling pressure.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
