The gulf between bulls and bears has never widened so quickly inthe $12 trillion market for U.S. government bonds.

The proportion of investors betting on gains or losses inTreasuries, rather than holding a neutral view, almost doubled thisyear to 51 percent, a client survey by JPMorgan Chase & Co.showed. The 23 percentage-point jump is the most for the periodsince the top-ranked firm for U.S. fixed-income research byInstitutional Investor magazine began its weekly survey in2003.

With Treasury yields at historically low levels, the stakes arerising as the Federal Reserve cuts back the bond buying that's helddown borrowing costs on trillions of dollars of debt fromgovernments to companies and individuals. The debate pits PacificInvestment Management Co.'s Bill Gross, who says yields can staylow because growth and interest rates won't return to pre-crisislevels, against market-rules theorist Robert Farrell, who contendsasset prices always revert toward the average.

“With yield levels so low it's very difficult to be neutral,”Jack McIntyre, a money manager at Brandywine Global InvestmentManagement LLC, which oversees $44.5 billion, said in a telephoneinterview from Philadelphia on May 30. “At this point in the game,you either believe or you don't.”

McIntyre, who runs a global bond fund, prefers Treasuries toother high-quality government debt such as German bunds.

The 2.81 percent return on Treasuries this year, the biggestover the period since 2010 based on the Bloomberg U.S. TreasuryBond Index, has been propelled as uneven jobs growth, a lack ofinflation and the conflict in Ukraine burnished the appeal of U.S.government debt.

The gains upended the predictions of most forecasters, whoforesaw losses pushing yields higher for a second straight year asthe Fed pared its $85 billion-a-month bond buying program and thefive-year U.S. expansion finally took hold.

Yields on the 10-year note, the benchmark for everything frommortgages to corporate bonds and emerging-market government debt,have fallen instead. From the start of the year, they havedecreased a half-percentage point to end at 2.59 percent last week,close to average since the recession ended in June 2009. The yieldwas 2.61 percent today as of 9:48 a.m. in New York.

In each of the three prior U.S. expansions dating back to 1982,10-year yields averaged more than 4 percent, according to datacompiled by Bloomberg.

'Disorienting Environment'

With yields so low, the divide among bulls and bears hasincreased. While more than 70 percent of respondents to JPMorgan'sweekly survey—which includes institutions as varied as hedge funds,pensions, and central banks—held a neutral view on Treasuries atthe start of 2014, a majority now anticipate either gains orlosses.

At the same time, the percentage with bearish outlooks has morethan doubled to an almost eight-year high of 40 percent.

“It's been a disorienting environment,” Robert Tipp, the chiefinvestment strategist at Prudential Financial Inc.'s fixed-incomeunit, which oversees $335 billion, said in a telephone interview onJune 2.

He said yields can stay low because lackluster growth in theU.S. economy, which contracted in the first quarter, means therewon't be enough inflation to compel the Fed to raise interest ratesmuch before stopping.

The Fed has held its benchmark rate close to zero since 2008,and trading in the futures and swaps markets suggest the rate willremain below 2 percent through March 2017.

One reason the Fed's preferred measure of inflation has failedto reach its 2 percent goal for 24 consecutive months is becausewage growth has been slow to rebound.

Hourly earnings have increased 2.1 percent on average since therecession ended, a percentage point less than during the priorexpansion, according to the Bureau of Labor Statistics.

The lack of pricing pressure aligns with the “new neutral” viewon rates and the economy that Gross, the Newport Beach,California-based co-founder of Pimco, the world's biggest bond fundmanager, says will remain in place for years to come.

The European Central Bank's unprecedented package of stimulus measures introduced lastweek, including its decision to cut the deposit rate to minus 0.1percent, is also helping make Treasuries more attractive on arelative basis.

Treasury 10-year notes yield 1.24 percentage points more thanGerman bunds, the most since 1999, data compiled by Bloomberg show.Italian and Spanish bond yields ended below 3 percent for the firsttime on record last month, while yields on French notes fell to anall-time low of 1.656 percent last week.

The extra yield that benchmark 10-year notes offer over theirGroup-of-Seven counterparts reached 71 basis points, the most sinceApril 2010,

“Treasuries are in a good spot,” Jeffrey Rosenberg, the chiefinvestment strategist for fixed income at BlackRock Inc., theworld's largest asset manager overseeing $4.4 trillion, said bytelephone on June 6. In an environment of zero rates, “the relativeyield conversation dominates the agenda.”

For the bears, investors in Treasuries risk being lulled intocomplacency by failing to realize how far yields have fallen fromhistorical averages as the U.S. economy strengthens, according toDavid Rosenberg, the chief economist at Gluskin Sheff &Associates and a disciple of Farrell.

Rosenberg predicts U.S. consumer prices will reach 3 percent inthe next 12 months to 24 months. The consumer price index measuredby the Labor Department rose 2 percent in April from a yearearlier, the most since July.

“The bond market is divorced from economic reality,” he said byphone on May 30. “There are hurdles in the post-crisis world andthe economy still has warts, but this is not 2008.”

'Substantial Risk'

Employment gains in May pushed U.S. payrolls past theirpre-recession peak and the jobless rate held at an almost six-yearlow. Forecasters are also sticking to their calls that the world'slargest economy will expand 3.1 percent next year, the fastest pacein a decade, a Bloomberg survey showed.

The notion that yields, which never dipped below 3 percent inthe half century before the credit crisis, can stay this low wouldalso violate one of Farrell's market rules that stipulates marketsalways revert to long-run averages.

The rules, developed during his 25-year stint as chiefstrategist at Merrill Lynch from 1967 to 1992, helped earn himInstitutional Investor's award for overall market direction 16times over 17 years. Farrell, who has since retired, declined tocomment on the direction of yields.

“There is substantial risk being bullish on Treasuries,”Jennifer Vail, the Minneapolis-based head of fixed-income researchat U.S. Bank Wealth Management, which oversees $112 billion, saidon June 6. “Rates are absolutely headed higher.”

She said yields on the 10-year note will rise to 3.4 percent bythe end of the year.

Growth and demand haven't picked up enough to abandonTreasuries, especially when Fed Chair Janet Yellen said on May 7that there will be “considerable time” before the central bankraises interest rates, according to Tad Rivelle, the LosAngeles-based chief investment officer for U.S. fixed-incomesecurities at TCW Group Inc., which manages more than $130 billionand holds shorter-term Treasuries.

“This is no time to be a hero,” he said in an interview atBloomberg's New York headquarters on May 29.

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