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The Disastrous Bet Against Bonds Bears Just Can’t Refuse

You’d think investors would sour on a bet against bonds that’s lost 25 percent in seven months.

Turns out some people have a very high tolerance for pain.

Investors have poured $1.1 billion into the ProShares UltraShort 20+ Year Treasury exchange-traded fund this year, undeterred by the third-worst performance among all U.S. fixed income ETFs. The fund, which acts as an amplified bearish wager on longer-term U.S. Treasuries, has received $49 million in the past week alone and is the eighth-most popular ETF among its peers in 2014, according to data compiled by Bloomberg on flows.

Some bond skeptics just aren’t ready to give up their belief that Treasury yields will rise in the next few months, despite waiting for years for that to happen with little to show for it. That ETF has lost about 79 percent since its May 2008 inception, Bloomberg data show.

Derivatives-based debt ETFs are “definitely being used more on the hedged side,” said David Mazza, head of ETF research in Boston at State Street Corp.’s SPDR and SSgA units. “The largest inflows are coming from funds that offer short exposure to long-dated Treasuries.”

Investors are worried that they’ll give up on their skepticism of this year’s Treasury rally at precisely the wrong time. While longer-term U.S. debt has gained 14 percent this year, economists surveyed by Bloomberg still expect yields on 30-year government bonds to climb to 3.86 percent by year-end from 3.25 percent today.

Easy Money

The U.S. economy is showing signs of picking up, so they may be right that things are about to go their way. Fewer Americans filed applications for unemployment benefits last week, sending the average over the past month to an eight-year low in another sign that the labor market is gaining momentum, a Labor Department report showed today in Washington.

On the other hand, borrowing costs may stay low given Fed Chair Janet Yellen’s plans to keep easy-money policies in place for an extended period of time. Central banks from Europe to Japan are also trying to boost growth, limiting how much yields can rise around the world.

“We remain bullish on bonds despite their strong performance so far this year,” wrote HSBC Holdings Plc strategists led by Steven Major in a report today. “We are not suggesting rates won’t eventually rise, just that” traders appear to be ahead of the move right now, they wrote.

Investors are still looking for a hedge, and the ProShares ETF that trades under the ticker TBT is a super-sized one at that. It uses derivatives and leverage and has grown to include $4.4 billion of assets.

A related ProShares fund that trades under the ticker TBF and follows a similar, yet less leveraged, strategy has lost 14 percent this year. In response, investors have plowed $69.7 million into the fund in 2014, Bloomberg data show.

These investors may end up being right, with big gains when many of their peers lose out. But it will have been an awful long, and painful, journey to get to that prize.

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