Martin Weiss: A bearish look at bonds

"Each and every day, Washington is sowing the seeds of the next financial disaster — a crash in the U.S. bond market," warns Martin Weiss, adding,  "Our foreign creditors are growing more disgusted, the day of reckoning is rapidly approaching."

In his top-notch The Safe Money Report, he looks to ProShares UltraShort 20+ Year Treasury (NYSE: TBT), a leveraged inverse bond exchange-traded fund that profits from declining bond prices.

"The Treasury Department and Federal Reserve are driving us inexorably in that direction with every inflationfueling promise of free money, every deficit-exploding bailout, and every multi-billion dollar bond auction.

"Worse, investors are more exposed to a bond market crash than at virtually any time in recorded history. We say that because investors are dog-piling into bonds like never before.

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"In the first 10 months of this year, they added a paltry $4.6 billion to conventional stock mutual funds. At the same time, they invested a whopping 61 times more — $280 billion — in bond funds.

"Apparently, investors aren’t worried about losing money in bonds. They see them as bulletproof — a much safer alternative to equities. But the cold, hard truth is
that bonds can plunge in value just as much as stocks.

"And that’s not just true for high-yield, or 'junk,' bonds. It’s also the case with medium- and long-term Treasuries!.

"Consider that between June 1979 and February 1980, the price of 30-year Treasury bonds fell from about 92 to 62. In other words, long-term Treasuries lost almost one-third of their value in just eight month.

"Or consider the bond market collapse from September 1993 to November 1994. Bonds tanked from around 122 and to 96. Total loss? More than 21% in just over a
year.

"And if you think all that’s past history, look at the price collapse that began just last year. Treasury bonds plunged 30 points between December 2008 and June of this year. Interest rates almost doubled — from 2.5% to 4.8%.

"And those declines could be child’s play compared to the bond market plunge we see coming. That leaves you with two choices:

1. You can ignore the warning signs just as they are doing in Washington. You can assume our nation’s credit card will never be declined. You can just go on hoping for the best, while not preparing for the worst.
   
2. Or you can act now  to build a protective wall around your portfolio. And you can go on the offense, turning this looming disaster into one of the greatest profit opportunities of a generation.

"It’s easier than ever before to hedge your portfolio against rising interest rates and falling bond prices with Inverse bond ETFs and funds.

"Now you can simply buy exchange traded funds (ETFs), mutual funds, and other instruments in your regular brokerage account. This avoids the open ended risk of shorting.

"Our favorite vehicle is the ProShares UltraShort 20+ Year Treasury. This ETF is designed to rise 2% for every 1% price decline in long-term U.S. bonds. It has plenty of liquidity, with average volume of more than 6.4 million shares a day.

"And unlike some other leveraged ETFs, it has done a pretty good job of tracking its benchmark over time: TBT is up about 28% from its December low, while long bond futures are down about 15% in the same period. "