Players Still Play

Treasury Haters Gonna Hate

Bearish bets on the debt could cause pain for a long time to come.

It’s apparently a lot of fun to bet against U.S. Treasuries. So much fun, in fact, that traders just keep doing it, regardless of how much money they lose in the process.

Michael Hasenstab is a good example of this. The well-known Franklin Templeton bond-fund manager, who’s known for his contrarian wagers, reaffirmed his dislike of the government debt in a Bloomberg Television interview this week.

He called the debt one of the world's biggest financial bubbles, adding that buying Treasuries "is like walking on a lake in April. It's frozen, but eventually it's going to crack."

Indeed, this has been a popular view for years and has only escalated as time goes on, with an unprecedented volume of bearish bets on the debt earlier this year. Treasury yields are below their longer-term averages and have been for years. It just feels wrong for the U.S. government to be able to borrow at such low rates, especially as the nation's deficit deepens and inflation shows signs of picking up.

Below Average

U.S. Treasury yields have declined to all-time lows in recent years

Source: Bloomberg

And yet traders who have tried to short these bonds have belly-flopped again and again. It has been a predictable pain trade, including for Hasenstab, whose bearish view on Treasuries has generally been a drag on his performance over the past few years with a notable exception of late last year.

Right now, there are some decent arguments for why this time is different and Treasury yields will, in fact, finally rise. The Federal Reserve has been slowly raising benchmark short-term rates. The U.S. economy appears to be climbing out of its malaise, with companies posting surprisingly good first-quarter earnings.

But there are an equal number of reasons to believe that this debt will continue to chug along. Yes, growth is picking up, but it's not showing any signs of going gangbusters. In fact, the latest economic data has increasingly come in below analysts' estimates.

Negative Surprise

U.S. economic data has been coming in weaker than analysts have expected

Source: The Citi Economic Surprise Indexes

Plenty of money is still pouring into longer-term Treasuries, especially relative to short-term debt. Other investors are hanging on the edges, waiting for yields on the notes to rise just a touch more before diving in. This indicates that investors are reducing their expectations for growth over the longer term and will provide a floor under the debt's value.

Closing the Gap

The U.S. yield curve has narrowed as traders reduce their growth expectations

Source: Bloomberg

It's admirable that Hasenstab and many other traders are still waiting for Treasury yields to rise rapidly enough to foist losses upon this nearly $14 trillion market. It's increasingly lonely to be a bear, and these investors may find themselves feeling isolated (and frustrated with losses) for a long time to come.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lisa Abramowicz in New York at

    To contact the editor responsible for this story:
    Daniel Niemi at

    Before it's here, it's on the Bloomberg Terminal.