Do You Believe There is a Bond Bubble ? Some Ideas on How to Profit From It.

I’ve written a few times about well known investors warning of a bond bubble both in Treasuries and in Corporate Bonds. Here are a couple of instances





Jeremy Siegel





http://www.gurufocus.com/news.php?id=105081





Jim Grant





http://www.gurufocus.com/news.php?id=104083





Jeremy Grantham





http://www.gurufocus.com/news.php?id=100763





I read this morning about Peter Schiff who gets a lot of TV face time making even more dramatic statements such as “The bond market is the mother of all bubbles right now and I think when it bursts the losses will dwarf the combined losses of the stock market bubble and the real estate bubble,” said Schiff during a recent TV interview. “This decade will be the worst decade for bonds in U.S. history.”[url=http://etfdb.com/2010/seven-etfs-to-invest-like-peter-schiff/][/url]


Besides the concerns harbored by Schiff relating to the creditworthiness of debt issued by the U.S. government, there are other factors that could potentially send long-term bonds sharply lower. Interest rates in much of the developed world continue to hover around record lows. And while a tightening campaign from Bernanke & Co. certainly isn’t imminent, rates really can’t go much lower. Odds are that economic fundamentals will eventually stabilize and inflationary concerns will become more significant, resulting in increasing interest rates. Because of the extended durations of long-term Treasuries, such a development could be particularly devastating for this asset class.


While I haven’t been able to convince myself that I believe that this is a bond bubble that is about to burst, it is pretty hard to figure out how rates could go much lower. So in the spirit of learning and thinking about ways to profit from a bursting bond bubble I found an article that supplied 4 ETFs that allow you to short Treasuries. I’m not using any of these and don’t have any plans to near term, but am passing this along (from an article I read today) for those like me who are interested in the subject.

“ETFs To Short Treasuries

Some investors concerned about a potential bubble under long-term bonds have moved to shorten up their duration exposure, tilting fixed income exposure towards lower-yielding securities that won’t be battered as severely if rates head higher or investors regain some of their appetite for risk. For more aggressive investors looking to capitalize on a potential deflation of a bond bubble, there are a handful of ETF options designed to provide inverse exposure to long-term Treasuries:

• ProShares Short 20+ Year Treasury (TBF): This inverse ETF seeks to deliver daily results that are equal to -100% of the Barclays Capital U.S. 20+ Year Treasury Index, a benchmark consisting of long-dated Treasuries. Because TBF resets exposure daily, the returns over multiple trading sessions won’t necessarily correspond to the inverse of the related benchmark; performance over extended periods of time will depend on the path taken by the bond index.

• ProShares UltraShort Barclays 20+ Year Treasury (TBT): This fund is similar to TBF, but instead offers -200% leverage on the same index. That means that TBT seeks to deliver daily results that correspond to -200% of the change in the reference benchmark. Reflecting the tremendous popularity in short exposure to long-dated Treasuries in the current environment, TBT has become the largest leveraged ETF on the U.S. market; assets currently stand at more than $4 billion.

• Direxion Daily 20 Year Plus Treasury Bear 3x Shares (TMV): This ETF provides even more leverage, seeking to deliver daily results equal to -300% of the daily return on the NYSE 20 Year Plus Treasury Bond Index. The rally in bond markets has send TMV down nearly 50% this year, but this leveraged ETF could be a powerful tool if the bond bubble begins to deflate.

• PowerShares DB 3x Short 25+ Year Treasury Bond ETN (SBND): This product also offers 3x inverse leveraged exposure to long-dated Treasuries, but is different from TMV in two key aspects. First, SBND’s exposure resets on a monthly basis, where as the timeframe maintained by TMV is daily in nature. Second, SBND is structured as an exchange-traded note, while TMV is an ETF.

It’s worth noting that long-term bonds have been written off once already in the recent past–right before they began their skyward climb. In late 2009, countless investors were convinced that inevitable rate hikes would deal a blow to bond investors, hitting those with the longest durations the hardest. With lingering uncertainty over the further quantitative easing programs from the Fed and the overall strength of the economy, the Treasury market could continue to exhibit higher-than-normal volatility for some time. That could create interesting opportunities for investors in the aforementioned ETFs–as well as considerable risk.”

Bloomberg reported back in August that Berkshire Hathaway is shortening the duration of its bond portfolio which is a signal that Buffett is preparing for inflation which would spell trouble for bond values:

http://www.bloomberg.com/news/2010-08-10/buffett-shortens-duration-of-bond-portfolio-after-warning-about-inflation.html

Personally, I wonder how much the volatility of the last few years is driving the herd to bond funds which are forced to buy bonds no matter what they are yielding. Once that floodgate opens when people realize that they can lose money through inflation by sitting in long term bonds it could get ugly quickly.