ETF Trends
ETF Trends

Inverse ETFs designed to short U.S. Treasuries are sitting on losses this year as yields remain near historic lows despite repeated warnings that Treasury bonds are a bubble poised to burst.

ProShares Short 20+ Year Treasury (NYSEArca: TBF) is down about 8% this year. The ETF delivers 100% of the inverse, or opposite, return of an index of long-term Treasuries, on a daily basis.

A pair of leveraged bearish ETFs, ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) and Direxion Daily 20+ Year Treasury Bear 3x Shares (NYSEArca: TMV), have lost about 16% and 25%, respectively, according to Morningstar. [Shorting Treasury Bonds with ETFs]

In fairness, these products are designed for traders rather than buy-and-hold investors, so their long-term returns aren’t very relevant. However, the losses do illustrate that betting against Treasuries hasn’t worked very well this year.

“The world has been very bearish on bonds for years and has been very wrong,” writes James Bianco of Bianco Research at The Big Picture blog. “At some point the bond bears are going to be right. But after a decade of crying wolf, it is hard to listen to these calls.”

‘Danger on two fronts’

Treasury yields are still extremely low with the 10-year note yielding less than 1.7%. U.S. government bonds have enjoyed a multi-decade bull market but investors have been warned for years the party has to end sometime.

The Federal Reserve and its quantitative easing programs have helped keep rates depressed, and Fed has pledged to keep rates low until 2015. Also, reduced risk appetites and Europe’s debt crisis have kept a steady bid under U.S. Treasuries.

Of course, the definition of a bubble is that it goes higher and longer than most investors expect. Still, investors who have piled into Treasuries and bond ETFs could get burned when rates eventually rise. Bond yields and prices move in opposite directions.

Savers who have flooded into bonds with very low yields “face danger on two fronts: on the one hand, their income could be eroded by inflation, while on the other, the value of their holdings could fall sharply when interest rates do start to rise,” the Financial Times recently reported.

‘Worst nightmare’

The New York Post compares U.S. Treasuries in baby boomers’ portfolios to a “ticking time bomb ready to explode, and most investors know little about it.”

Due to the generational rally in U.S. bonds, investors have been trained that the asset class is risk-free and that they can’t lose money.

“And rates would not have to go through the roof to take out billions in principal for investors, most of whom are in bonds because they are nearing retirement,” the NY Post reported.

“It’s my worst nightmare,” said a bond fund manager in the article. “There’s nothing I can do — the checks come in [from clients]every day, and I have to invest it.”

‘Hard to be a bear’

Yet some managers who were previously bearish on Treasuries are now buying.

“The combination of Federal Reserve efforts to stimulate the economy by buying bonds and the potential slowdown should politicians fail to avert the so-called fiscal cliff of tax increases and spending cuts has made Treasuries the debt that money managers have to own,” Bloomberg News reports.

“Treasuries offer little real value, but in the short term, it is just hard to be a bear,” said Donald Ellenberger, a manager at Federal Investors.

Indeed, some investors are using Treasuries as a safe haven to ride out the fiscal cliff or another potential deflationary bout.

Bianco predicts that yields are going to stay low for an extended period despite the fact most economists think that rates will be rising, Yahoo Finance reports.

“They haven’t for many years, and I don’t think they’re going to for many years,” since Fed bond purchases will keep yields low, he said.

“Stop going for yield, because we’re in a world where there is no yield,” Bianco added in the story. “I’m going to stick with the lower-yield, safer instruments. I’m not going to reach out for high yield or emerging markets where I think that those markets are starting to get a little bit frothy.”

ProShares Short 20+ Year Treasury (NYSEArca: TBF)

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.