Aristocracies and their silver

By Dakin Campbell

Dec. 1 (Bloomberg) -- In the best year for Treasuries since 2002, fund managers who only buy government bonds are seeking permission to invest in corporate debt they considered toxic just a month ago.

Treasuries ``are yielding next to nothing,'' said Robert Millikan, who manages $5 billion at BB&T Asset Management in Raleigh, North Carolina, including the $51 million BB&T Short U.S. Government Fund. ``Trying to do something for your shareholders, it's hard to sit there and buy a bond that yields less than any fees you charge.''

That helps explain why BB&T, BlackRock Inc., T. Rowe Price Group Inc. and Sage Advisory Services Ltd. are looking elsewhere for returns, including bonds of the banks that were almost ruined by $967 billion in losses and writedowns since the start of 2007. Treasury funds are receiving permission to buy debt of Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc. after the Federal Deposit Insurance Corp. finalized plans on Nov. 21 to guarantee their debt.

The FDIC program announced on Oct. 14 is part of the more than $1.5 trillion in unprecedented financing from the Treasury and the Federal Reserve to end the worst financial crisis since the Great Depression. The U.S. now guarantees more than $13 trillion of debt.

`Great Substitute'

Goldman, which registered as a bank in September after 139 years as a securities firm, became the first U.S. company to take advantage of the program, selling $5 billion of 3.25 percent FDIC-backed notes on Nov. 25. The debt, which matures June 2012, was priced to yield two percentage points more than Treasuries of similar maturity. Before the government announced the guarantees, New York-based Goldman's 6.15 percent bonds due 2018 yielded about five percentage points more than government debt.

Morgan Stanley, which also became a bank on Sept. 21, sold $5.75 billion in FDIC-backed debt in three series, including $2.5 billion of three-year, 3.25 percent notes at a spread of 186 basis points. As recently as Oct. 13, the New York-based company's notes yielded more than six percentage points more than Treasuries.

``It's a great substitute,'' said Millikan, whose Short U.S. Government Fund returned 4.55 percent the past year, beating 78 percent of its peers. He gained approval from BB&T's lawyers to purchase FDIC-backed debt and may buy bonds from New York-based Citigroup Inc. and Bank of America Corp. in Charlotte, North Carolina.

As much as $600 billion of the FDIC-backed bonds may be issued by the time the program ends in June, according to Barclays Plc. Sales of the bonds already total $17.25 billion.

``A lot of Treasury-only funds will be looking at'' FDIC- backed notes, said Brian Brennan, who helps oversee $13 billion in fixed-income assets at T. Rowe Price in Baltimore. ``For investors who are seeking safety, this is a safe instrument that provides more yield.''

``Treasury rates are going higher,'' said Mark MacQueen, a partner and money manager at Austin, Texas-based Sage Advisory, which oversees $6 billion. ``I plan to invest in the guaranteed debt.'