Treasury bonds and related exchange traded funds have rallied despite a strengthening economic recovery and inflationary pressures.

Over the past three months, the Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT) has increased 1.0% and the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT) has advanced 5.9%.

Many fixed income investors were burned this year as individuals bet that a rebounding economy and rising inflationary pressures would cause Treasury yields to rise. However, yields on benchmark 10-year Treasuries are now back to about 1.32% after hitting a high of 1.73% back in March. Bond prices and yields have an inverse relationship.

“It’s not a great feeling,” Zhiwei Ren, fixed-income portfolio manager for Penn Mutual Asset Management, told the Wall Street Journal. “If you look at the fundamentals, it completely supports the position we are holding. But the market just completely moves against you relentlessly, so you basically have to cover your bets.”

Ren wasn’t the only one looking toward rising rates. So many investors have been betting against Treasuries that yields were positioned to fall significantly with just a slightest touch from those who actively wanted to go long on bonds, according to some analysts. Consequently, the Treasury market may have fallen victim to a so-called short squeeze where investors moved to cover shorts positions by buying into Treasuries to close out their shorts, which further helped fuel the rally and pushed others to do the same.

Furthermore, some market observers have argued that yields could stay within range as the recent surge in inflation has been attributed to supply bottlenecks that could be remedied over the next year as the world attempts to return to pre-pandemic conditions. Such a macro environment would likely see slower growth and inflation, which would make it more difficult for the Federal Reserve to hike interest rates.

For more news, information, and strategy, visit the Fixed Income Channel.