By Daniel Kruger Oct. 27 (Bloomberg) -- Investors in U.S. Treasuries are beginning to shift money into corporate and federal agency debt in a sign that the credit crisis may be at its apex. ``We've probably seen the bulk of the gains we're going to see in Treasuries,'' said Donald Ellenberger, co-head of government and mortgage-backed securities at Pittsburgh-based Federated Investment Management Co., which oversees $21 billion in fixed-income assets. Ellenberger's Federated U.S. Government Securities Fund has outperformed 98 percent of its peers year- to-date, according to Morningstar. The flight from all but the safest of government debt has left investment-grade company bond yields at a record 6 percentage points more than Treasuries on average while securities sold by government-chartered enterprises Fannie Mae and Freddie Mac yield an extra 1.5 percentage points, also an all-time high, according to Merrill Lynch & Co. indexes. What's starting to make Treasury bulls wander are signs that the credit freeze may be about to break. The cost of borrowing dollar-denominated loans overnight in London last week fell to the lowest level since June 2004. The Federal Reserve will begin buying money-market securities including short-term company IOUs known as commercial paper today, while the government will start to guarantee new debt issued by banks. Compelling Value ``You're starting to see some pretty compelling value, particularly given that you're starting to see signs of healing in the financial system,'' said Stuart Spodek, co-head of U.S. bonds in New York at BlackRock Inc., which manages $502 billion in debt. JPMorgan Chase & Co. recommended in a report to clients dated Oct. 24 that investors should own a greater percentage of federal agency debt and mortgage bonds, and bank debt securities relative to Treasuries. Barclays Capital said in a report dated Oct. 27 that high-risk and emerging market bond yields ``have reset to more appropriate levels.'' Straying from Treasuries each time speculation rose that the worst of the credit rout was over has proven to be unprofitable. U.S. government debt has returned 1.8 percent this year, including reinvested interest, compared with a loss of 17 percent for corporate bonds and a gain of 0.8 percent for agencies, according to Merrill Lynch's indexes. ``It's time to start nibbling'' in securities other than Treasuries, said Maxwell Bublitz, who oversees $3.5 billion in fixed-income assets as the chief strategist at San Francisco- based SCM Advisors LLC. ``We've had so many false starts over the last five or six months, and every time people got whacked. It's time.'' Record Low The 30-year Treasury bond yield plunged 27 basis points last week to 4.062 percent. It reached 3.8676 percent on Oct. 24, the lowest since regular issuance of the security began in 1977. The yield fell 6 basis points to 4.01 percent as of 9:57 a.m. in London. The price of the 4 percent security maturing in August 2018 climbed 11/32, or $3.44 per $1,000 face amount, to 103 2/32, according to BGCantor Market Data. Concern that the economic recession will extend through 2009 and more financial institutions will fail may keep Treasuries from falling, according to the investors. ``If you think fear will rule the market and the flight to quality will continue, than they will probably continue to do well,'' Ellenberger said. Many bond investors say they are concerned about the flood of debt the U.S. will sell to finance the budget deficit and bank bailouts. More Supply Gross issuance of Treasury coupon securities will rise to about $1.15 trillion in the 2009 fiscal year from $724 billion last year, according to Credit Suisse Securities USA LLC, one of the 17 primary dealers of U.S. government securities that are obligated to bid at the Treasury's auctions. The Treasury will likely reintroduce the three-year note, switch to monthly sales of 10-year notes, and auction new 30- year bonds on a quarterly basis, according to the firm. The U.S. already sold an additional $40 billion of debt to meet demand for government securities on Oct. 8. ``Because of the increased supply in Treasuries we think Treasuries will underperform,'' said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. ``We're looking to deploy that in very high quality corporate bonds and perhaps to the guaranteed bank debt.'' PepsiCo's Bond New issues, such as the Oct. 21 sale of $2 billion of 10- year senior unsecured notes from PepsiCo Inc., the world's largest snack maker, sell at yields exceeding 4 percentage points more than Treasuries of similar maturity, according to data compiled by Bloomberg. The spread on PepsiCo's notes was more than three times wider than the last time the company issued debt in May. Federated's multi-sector bond funds have begun selling Treasuries and adding corporates, agency mortgage-backed securities and agency debt, Ellenberger said. SCM's Bublitz said he is paring his holdings of Treasuries, after owning a greater percentage compared with his benchmark index, because corporate and mortgage debt is offering some of the biggest yield premiums ever over government securities. ``You're getting compensated with a very significant spreads,'' said BlackRock's Spodek, who is selling Treasuries and buying corporate and mortgage debt. ``Over time we would expect to see these spreads compress.'' New York Life Investment Management money manager Thomas Girard, who held 10-year Treasuries until they reached his 3.6 percent target yield, said he is now buying asset-backed securities, residential and commercial mortgage debt and corporate bonds with the proceeds of Treasury sales. ``Even if spreads don't come racing in, you're clipping a pretty attractive coupon,'' said Girard, who helps manage $110 billion in fixed-income assets in New York. To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

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