The worst thing investors in U.S. exchange-traded bond funds could have done so far this year was trust economists’ forecasts for Treasuries to fall.
Nine of the 10 biggest ETF losers in the U.S. debt market all follow the strategy of betting against Treasuries, based on data compiled by Bloomberg as of Thursday. Investors have suffered the steepest declines in the iPath U.S. Treasury 10-year Bear ETN, which has slumped about 20 percent in 2015.
At the end of 2014, it looked like betting on Treasury market losses would be a sure thing. With Federal Reserve Chair Janet Yellen poised to raise interest rates this year for the first time in almost a decade, forecasters were convinced prices had had nowhere to go but down.
The opposite happened.
Instead of dropping, U.S. government securities are drawing demand this year because they yield more than bonds in Japan or Europe. Uneven economic growth is making investors question how fast the Fed can increase borrowing costs.
“There’s overseas demand, and the economic numbers haven’t been that strong,” said Ali Jalai, a bond trader at Bank of Nova Scotia in Singapore. “That’s putting doubt into people’s minds as to how much and when the Fed’s going to tighten. There’s only so much that Treasuries can sell off.”
The U.S. 10-year yield was little changed at 1.88 percent at 6:35 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2 percent note due February 2025 was 101 1/32.
Ten-year bonds yield 0.085 percent in Germany and 0.31 percent in Japan.
While U.S. job gains topped 200,000 in January and February, they slowed to 126,000 in March, spurring some investors to push back forecasts for the Fed to boost rates.
Policy makers will act in about December, a Morgan Stanley index shows. A month ago, the prediction was for September.
The Treasury market is also signaling traders are scaling back forecasts for when the central bank will move.
The difference between five- and 30-year yields expanded to 128 basis points Friday, the most since December.
A widening spread shows shorter maturities, those more sensitive to what the Fed does with interest rates, are outperforming longer ones as traders push back forecasts for higher borrowing costs.
U.S. government securities have returned 2 percent this year as yields fell overall, based on data compiled by Bloomberg.
As for economists, they still see yields rising through the rest of 2015, through they’ve scaled back their forecasts. Ten-year borrowing costs will climb to 2.52 percent by Dec. 31, based on a Bloomberg survey with the most recent forecasts given the heaviest weighting.
At Bank of Nova Scotia, Jalai says it’s more likely the consensus will be wrong again. He’s forecasting 1.75 percent, which would make even bigger losers out of bond bear funds.