Bond bears have gotten badly burnt in recent years, with even heavy hitters such as Bill Gross and Ray Dalio getting calls wrong. So, many who seek to bet against the rally are turning to options -- positions that will pay off on debt declines, with the maximum risk limited to losing the premium paid.

Investec Asset Management took profit on long positions in Treasuries, and has bought options to sell the yen as a proxy for bearish bets on Japanese debt.

“The simple view is bonds are undoubtedly expensive,” said Russell Silberston, a money manager at the fund. “We have taken out some yen put options in small size as these are highly correlated with yields.”

Resco Asset Management is also using derivatives to position for bond declines, and in the U.S. the firm has bought put options in five-year Treasuries with an October expiry. While the premium was high due to a jump in market volatility, a bearish position is worth it given how low yields are and the large amount of monetary easing already priced in, according to money manager David Ric.

“Low yield doesn’t mean low risk,” Ric said. “The massive bazooka” of monetary stimulus “is probably already priced,” he said.

Cutting Duration

Another way to insulate a bond portfolio is to shorten its duration, a gauge of how sensitive holdings are to interest rates, by increasing allocations into shorter-dated securities.

While many money managers taken duration to extremes -- snapping up Austria’s 100-year bond and pushing the premium on longer-dated debt to a 58-year low -- some are going the other way.

JPMorgan Asset Management saw increased inflows into its European ultra-short duration fixed-income fund, with 15% of its assets coming in this year alone. TwentyFour Asset Management’s Chris Bowie is paring maturities and sees short-dated U.K. debt as offering better protection against volatility.

“The blind hunt for yield will continue but pockets of investors are starting to question when the music stops, what am I actually invested in, is this risk profile appropriate for me?” said Jemma Clee, head of investment specialists for EMEA at JPMorgan Asset. “It’s a risk-off trade for a fixed-income investor.”