March 22 (Bloomberg) -- The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg.
Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt
also traded at lower yields in recent weeks, a situation former
Lehman Brothers Holdings Inc. chief fixed-income strategist Jack
Malvey calls an “exceedingly rare” event in the history of the
bond market.

The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and
raised concerns whether the U.S. deserves its AAA credit rating.
The increased borrowing may also undermine the first-quarter
rally in Treasuries as the economy improves.

“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which
oversees $22 billion. “It could be the moment where hopefully
you realize that risk is beginning to creep into your credit
profile and the costs associated with that can be pretty
scary.”

Moody’s Warning

While Treasuries backed by the full faith and credit of the government typically yield less than corporate debt, the relationship has flipped as Moody’s Investors Service predicts
the U.S. will spend more on debt service as a percentage of
revenue this year than any other top-rated country except the
U.K. America will use about 7 percent of taxes for debt payments
in 2010 and almost 11 percent in 2013, moving “substantially”
closer to losing its AAA rating, Moody’s said last week.

“Those economies have been caught in a crisis while they are highly leveraged,” said Pierre Cailleteau, the managing director of sovereign risk at Moody’s in London. “They have to
make the required adjustment to stabilize markets without
choking off growth.”

Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said
John Lipsky, first deputy managing director of the International
Monetary Fund.

Unprecedented Spending

All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech yesterday at the China Development Forum
in Beijing. Already this year, the average ratio in advanced
economies is expected to reach the levels seen in 1950, after
World War II, he said.

Obama’s unprecedented spending and the Federal Reserve’s emergency measures to fix the financial system are boosting the economy and cutting the risk of corporate failures. Standard &
Poor’s said the default rate will drop to 5 percent by year-end
from 10.4 percent in February.

Bonds sold by companies have returned 3.24 percent this year, including reinvested interest, compared with a 1.55 percent gain for Treasuries, Bank of America Merrill Lynch index
data show. Returns exceeded government debt by a record 23
percentage points in 2009.

Berkshire Hathaway

Berkshire Hathaway’s 1.4 percent notes due February 2012 yielded 0.89 percent on March 18, 3.5 basis points, or 0.035 percentage point, less than Treasuries, composite prices
compiled by Bloomberg show. The Omaha, Nebraska-based company,
which is rated Aa2 by Moody’s and AA+ by S&P, has about $157
billion of cash and equivalents and about $52 billion of debt.

P&G, the world’s largest consumer-products maker, saw the yield on its 1.375 percent notes due August 2012 fall to 1.12 percent on March 18, 6 basis points below government debt. The
Cincinnati-based company, rated Aa3 by Moody’s and AA- by S&P,
makes everything from Tide detergent to Swiffer dusters.

New Brunswick, New Jersey-based Johnson & Johnson’s 5.15 percent securities due August 2012 yielded 1.11 percent on Feb. 17, 3 basis points less than Treasuries, according to Trace, the
bond-price reporting system of the Financial Industry Regulatory
Authority. The world’s largest health products company is rated
AAA by S&P and Moody’s.

Yields on bonds of home-improvement retailer Lowe’s in Mooresville, North Carolina, drugmaker Abbott Laboratories of Abbott Park, Illinois, and Toronto-based Royal Bank of Canada
have also been below Treasuries, Trace data show.

‘Avalanche’

“It’s a manifestation of this avalanche, this growth in U.S. Treasury supply which is under way and continues for the foreseeable future, and the comparative scarcity of high-quality
credit,” particularly in shorter-maturity debt, said Malvey,
whose Lehman team was ranked No. 1 in fixed-income strategy by
Institutional Investor magazine from 1998 through 2007.

Last year’s $2.1 trillion in borrowing by the government exceeded the $1.08 trillion issued by investment-grade companies, the biggest gap ever, Bloomberg data show. Malvey
said the last time he can recall that a corporate bond yield
traded below Treasuries was when he was head of company debt
research at Kidder Peabody & Co. in the mid-1980s.

While Treasuries are poised to make money for investors this quarter, they are losing momentum. The securities are down 0.43 percent in March after gaining 0.4 percent last month and
1.58 percent in January, Bank of America Merrill Lynch indexes
show.

Benchmark 10-year Treasury yields will reach 4.20 percent by year-end, up from 3.69 percent last week, according to the median forecast of 48 economists in a Bloomberg News survey.
Two-year yields will rise to 1.77 percent, from 0.99 percent.

Relative Yields

Investors demand 0.60 percentage point more in yield to own 10-year Treasuries than German bunds of similar maturity, Bloomberg data show. A year ago, debt of Germany, whose deficit
is 4.2 percent of its economy, yielded about half a percentage
point more than Treasuries.

President Obama’s budget proposal would create bigger deficits every year of the next decade, with the gaps totaling $1.2 trillion more than his administration projects, the
nonpartisan Congressional Budget Office said this month.
Publicly held debt will zoom to $20.3 trillion, or 90 percent of
gross domestic product, by 2020, the CBO forecast.

There’s “a lack of a long-term plan to deal with the federal budget deficit,” 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. “At some point
in time the market may lose its patience.”

Balance Sheets

Deutsche Bank and Barclays Plc, two of the 18 primary dealers of U.S. government securities that are obligated to bid at the Treasury’s auctions, say balance sheets of high-rated
companies make them more attractive than Treasuries.

Corporate borrowers are reducing debt at a record pace. Companies in the S&P 500 cut their liabilities by $282 billion to $7.1 trillion in the fourth quarter from the prior three
months, Bloomberg data show. That represents 28 percent of
assets, the least in at least a decade.

Investors are accepting smaller premiums to lend to companies, with yields on bonds rated at least AA falling to within 107 basis points of Treasuries on average, Bank of
America Merrill Lynch indexes show. That’s down from the peak of
515 basis points in November 2008, and approaching the record
low of 36 in 1997.

Adding to Corporates

New York Life Investment Management is adding to bets the difference in yields will continue to shrink.

“As the balance sheet of corporate America continues to improve and the balance sheet of the government deteriorates, that spread should narrow,” said Thomas Girard, a senior money
manager who helps invest $115 billion at the New York-based
insurer. “There is some sort of breaking point. The federal
government can’t keep expanding its borrowing without having to
incur some costs.”

For all the concern about U.S. finances, Treasuries are unlikely to lose their role as the world’s borrowing benchmark, said Michael Cheah, who manages $2 billion in bonds at
SunAmerica Asset Management in Jersey City, New Jersey. The U.S.
has the biggest, most liquid securities markets, said Cheah.

Speculating that Treasuries may lose their privileged position is “not a bet I want to put on,” said Cheah, who worked at Singapore’s central bank. Yields on 10-year notes are
about half their average since 1980.

Losing its Status

The last time there was talk of the U.S. losing its status as the world’s benchmark for bonds was in the late 1990s, when the government began amassing budget surpluses in 1998 for the
first time in almost three decades. The amount of Treasuries
outstanding dropped 8 percent to $3.4 trillion in 2000, the
biggest annual decline since 1946.

Treasury supply resumed growing in 2001 after two rounds of tax cuts proposed by President George W. Bush led to deficits. Outstanding Treasury supply rose 53 percent to $4.5 trillion in
2007 from 2000 as the U.S. borrowed to finance tax cuts intended
to revive a slumping economy. The amount has since risen 64
percent to $7.4 trillion.

More is on the way. The U.S. will sell a record $2.43 trillion of debt in 2010, according to the average forecast of 10 of the 18 primary dealers in a Bloomberg survey.

At the same time Treasury sales are rising, the cash position of the largest corporations is swelling. Companies in the S&P 500 held a record $2.3 trillion as of the fourth
quarter, Bloomberg data show.

Growing Supply

High-rated corporate bonds due in three to five years are most likely to yield less than Treasuries, according to Deutsche Bank’s Pollack. The growing supply of Treasuries with those
maturities will make government debt a bigger proportion of
indexes that fund managers measure their performance against, he
said. Managers betting Treasury yields will rise may diversify
into corporate debt, Pollack said.

“There’s no natural law that says a Treasury has to yield less than a corporate,” said Daniel Shackelford, who is part of a group that manages $18 billion in bonds at T. Rowe Price Group
Inc. in Baltimore. “It wouldn’t be the first time that I would
scratch my head and say ‘this doesn’t make sense, the market’s
behaving irrationally.’ And it can go on for much longer than
you may think.”