Grasping Reality on TypePad, by Brad DeLong

Suppose that Treasury short rates stay at 0 for X years, and then "normalize". When they normalize, they take three years to climb back to 5%, and then they stick at 5% until the 10-Yr bond matures. Then:

• If X=3 then you have lost money unless the current 10-Yr rate < 2.75%
• If X=2 then you have lost money unless the current 10-Yr rate < 3.25%
• If X=1 then you have lost money unless the current 10-Yr rate < 3.75%

The upshot? This: Shorting long Treasuries is a bet that (a) short-term rates will exceed 5% on average by a healthy margin once they normalize, or a bet that (b) they will start normalizing very soon now, or a bet that they will overshoots on the way down. And in the meanwhile, until rates "normalize", your trade is showing losses and your investors are seeking better performance elsewhere...