Stubborn Bond Bears Double Down on Money-Losing Wager

These bond bears just won’t go away.

Some even appear to be doubling down as their losses mount.

Exhibit A: As the ProShares UltraShort 20+ Year Treasury fund plunged 21.6 percent this year, investors have responded by plowing $525.3 million into the exchange-traded fund, which uses leverage and derivatives.

Exhibit B: Investors have boosted short wagers on Treasuries using futures contracts trading on the Chicago Board of Trade to 56 percent more than their five-year average. A few weeks ago, there were the most since March 2008.

Bears are sticking to their call that bond prices are going to collapse even as recent evidence points to the opposite: long-dated U.S. Treasuries have gained 11.9 percent this year, outperforming stocks and junk bonds. The short trade remains popular with individuals and professional speculators determined they will profit as the Federal Reserve pulls back on monetary stimulus.

“The bond bear ‘tourists’ have proven remarkably resilient in recent weeks,” Peter Tchir, head of macro strategy at Brean Capital LLC wrote in a note today.“I had expected to see bonds bears flushed out of the market on the last move, but they seemed stubborn, and I am not convinced that will change.”

Staying Solvent

There’s no one obvious reason why Treasury bonds keep rallying. Some analysts blame the weather. Others point out that Americans are getting old, risk-averse and more wed to the safety of bonds. It also could be unrest in Ukraine or China’s slowing economy or even speculation that the European Central Bank will start its own version of quantitative easing -- take your pick.

Whatever the reason, yields on 10-year Treasuries have plunged to 2.48 percent, the lowest since July, as their prices have soared. Yields on 30-year Treasuries have dropped to 3.32 percent from 3.97 percent at the end of December, according to Bloomberg Bond Trader prices.

The consensus remains that the rally can’t possibly go on, and that bond yields have to go up. Economists surveyed by Bloomberg still expect 10-year Treasury yields to rise 0.75 percentage point during the next seven months, to 3.23 percent at year-end.

There were 1.114 million short contracts using Treasury futures that were trading on the Chicago Board of Trade on May 2, compared with a five-year average of 713,000. There were 1.194 million such contracts on April 18, the most in six years, according to Commodity Futures Trading Commission data.

The question for all you bears is whether John Maynard Keynes’s famous observation will yet again be proven correct: The market can stay irrational longer than you can stay solvent.

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