America's improving fiscal health is starting to be reflected inthe market for Treasuries.

As the Federal Reserve scales back its unprecedented bond buyingthis year, the ability of the world's largest debtor nation toattract investors underscores the strides the U.S. has made tostrengthen its creditworthiness after the worst financial crisissince the Great Depression. With the budget deficit at a seven-yearlow and household wealth rising to a record, investors from mutualfunds to foreign central banks are buying a greater share ofTreasuries at government auctions than ever before, as bond dealersthat are obligated to bid by a smaller share.

“This goes a long way to blunting the criticism of investing inthe U.S. dollar,” Wan-Chong Kung, a bond manager at Nuveen AssetManagement, which oversees more than $100 billion, said in an April2 phone interview from Minneapolis.

Investors submitted bids for $1.73 trillion of government notesand bonds at auctions held in the first quarter, or 3.07 times the$564 billion that was sold, according to data compiled byBloomberg. The bid-to-cover ratio rebounded from last year's 2.87,which was the lowest annual level in four years.

The last time the ratio was higher on a quarterly basis was in2012, when demand peaked at a record 3.12 times. Investors alsobought 58.7 percent of Treasury debt issued last quarter, with therest purchased by the 22 primary dealers that trade with theFed.

Increased demand has helped curb U.S. borrowing costs,confounding forecasters who said yields would rise as the Fedstarted to cut back on its $85 billion of monthly purchases ofTreasuries and mortgage-backed bonds to support the economy.

After yields on the 10-year note reached a 29-month high of 3.05percent at the start of the year, they have since declined andended at 2.73 percent last week. Yields were little changed at 2.72percent as of 8:40 a.m. in New York.

Economists have responded by cutting their yield estimates everymonth this year. They now say yields on 10-year Treasuries, abenchmark for everything from mortgages to car loans and corporatebonds, will end the year at 3.34 percent, based on last month'smedian estimate in a Bloomberg survey. In January, their forecastwas 3.44 percent.

Bond buyers are demanding less compensation as the U.S. fiscalbalance improves. After budget shortfalls topped $1 trillion in thefour years after 2008 as the government boosted spending to bailout the nation's banks and revive the economy, the deficit is nowprojected to narrow to $514 billion this fiscal year, theCongressional Budget Office said on Feb. 4.

That's equal to 3 percent of the gross domestic product (GDP),which is close to the average of the past four decades.

Better Shape

The gap reached 9.8 percent of GDP in 2009, the widest in atleast three decades, data compiled by the agency show. A smallerdeficit reduces the amount of new bonds the Treasury needs to sell,which may help buoy demand as the Fed pulls back.

The Fed, which bought more than a half-trillion dollars ofTreasuries last year as part of its third round of quantitativeeasing, will stop purchasing bonds by October, economists'estimates compiled by Bloomberg show.

“The borrowing is coming down sharply on the public sectorside,” Robin Marshall, a fixed-income director at Smith &Williamson Investment Management, which oversees $23 billion, saidin an April 2 telephone interview from London. That's “bullish” forU.S. government bonds, he said.

Marshall said he has been buying longer-term Treasuries.

American consumers are also in better financial shape than everbefore. Net worth for households and non-profit groups climbed to arecord $80.7 trillion at the end of 2013, according to Fed datareleased last month.

After U.S. households had more of their wealth destroyed duringthe credit crisis than at any time since the end of World War II,they now have almost $12 trillion more in assets than theirpre-recession peak in 2007.

The same goes for American companies, which amassed more than $2trillion in cash for the first time as profits doubled from thelast quarter of 2008, according to data compiled by Bloomberg andthe Bureau of Economic Analysis.

Bond raters have taken notice. Fitch Ratings increased itsoutlook on the U.S.'s AAA grade on March 21 to stable fromnegative, joining Moody's Investors Service and even Standard &Poor's in assigning stable outlooks on the U.S. S&P dropped itsrating to AA+ in August 2011, citing political wrangling over thedebt limit and the lack of a plan to reduce deficits.

With the U.S. economy showing signs that the worst recession inseven decades is behind it, Richard Schlanger, a money manager atPioneer Investments, which manages $20 billion in fixed-incomesecurities, says there is more value in higher-yielding assets suchas stocks than Treasuries.

More Accommodative

Growth in the world's largest economy will accelerate to 2.7percent this year from 1.9 percent last year, according toeconomists surveyed by Bloomberg. By 2015, the U.S. will expand 3percent, which would be the fastest in a decade.

“It's slow and steady improvement,” Schlanger said in an April 4telephone interview from Boston. In the quarters ahead, “we'regoing to see much stronger growth and then bond yields are going todrift higher.”

Exchange-traded funds that invest in U.S. stocks amassed $17.4billion last month, the most among all classes of ETFs, datacompiled by Bloomberg show. At the same time, investors yanked$10.3 billion from the funds that buy U.S. government debt, thebiggest exodus since 2010.

While Fed Chair Janet Yellen accelerated the shift after sayingon March 19 that a strengthening U.S. economy may prompt thecentral bank to lift rates six months after it stops buying bonds,last week's payrolls report caused Treasuries to rally asspeculation, that the Fed will accelerate the unwinding of itsaccommodation and raise its benchmark rate, cooled.

Employers added 192,000 jobs in March, less than the medianforecast for a 200,000 gain in a Bloomberg survey. The result cameafter a 197,000 increase in February that was more than firstestimated.

Last week, Yellen followed up her March comments by highlightinginconsistencies in labor-market data, saying the recovery “stillfeels like a recession to many Americans.”

Traders have now dialed back their wagers on the likelihood theFed will start raising rates in June 2015 to 54 percent, based onfutures trading on the CME Group Inc.'s exchange, from 64 percent amonth ago. The Fed has held its benchmark rate at close to zerosince 2008.

The latest data will “help keep a bid in Treasuries,” GuyHaselmann, a New York-based interest-rate strategist at primarydealer Bank of Nova Scotia, said by phone on April 4.

Relative Value

With inflation still below the Fed's target of 2 percent,Haselmann said he prefers longer-dated Treasuries. U.S. governmentdebt due 10 years or more returned 6.9 percent in the firstquarter, the most since 2012. That outstripped the 1.8 percent gainincluding reinvested dividends for the S&P 500, the benchmarkgauge for American equity.

Geopolitical strife from Russia to Thailand, as well asincreasing concern over a slowdown in China, has reinforced thevalue of dollar-based assets. The dollar is forecast to rise 6.4percent versus the yen and 5.4 percent against the euro byyear-end, data compiled by Bloomberg show.

At the same time, yields on Treasuries are still higher relativeto bonds from other major global economies, making them attractiveto investors on a relative basis. The extra yield that investorsget for holding 10-year U.S. notes instead of similar-maturityGerman bunds increased to 1.19 percentage points last week, themost since October 2005.

“It's clear that U.S. Treasuries internationally demonstratedtheir place not only as the most liquid market but also, from arelative value standpoint, as very compelling,” James Camp, a moneymanager who oversees $5.5 billion in fixed income with Eagle AssetManagement, said in a telephone interview on April 4 from St.Petersburg, Florida.

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