Carlin Financial

If you sense that the bond market has been a kinder and gentler place than the stock market lately, your sense is pretty good. And it’s not just lately. As of the end of the third quarter, the 30-year total return on long-term Treasury securities edged ahead of returns for the Standard & Poor’s 500, a market-weighted index of 500 large, publicly traded U.S. companies. The last 30-year stretch when that occurred was back before the Civil War.

 It’s not that stocks have done badly over those three decades; the S&P 500 annualized 10.8%, not far below its longer term average. But the period featured an epic bull market for bonds with long Treasuries posting annualized total return of 11.5% according to Bank of America Merrill Lynch’s U.S. Master Treasury Index.

Bonds certainly have had a better 2011 than stocks as shown by the accompanying table of one-year trailing returns for major mutual fund categories. The five- and ten-year trailing numbers illustrate the edge that fixed income investments have had over the past decade.

 A long-awaited reversal of the historic decline in interest rates has yet to materialize here. But in Europe the bond market “vigilantes” are insisting on higher yields to finance over-indebted governments. Markets were unnerved recently when even Germany, Europe’s largest and strongest player, had trouble floating a bond offering as it began to look more likely that the euro zone crisis would ultimately tap German resources to a significant extent.

Meanwhile the cross currents potentially affecting U.S. interest rates are tricky. Recent economic numbers look encouraging which normally would be expected to nudge rates higher. And it’s not as if we don’t have our own debt concerns. But the euro zone crisis and investors’ general risk aversion has continued to drive money into the sovereign debt of the keeper of the world’s reserve currency. Plus there’s the Federal Reserve’s express commitment to keeping rates low. Maybe Uncle Sam can evidence just enough fiscal and economic progress to keep investors from souring on his IOUs as well.