ETF banks on a bubble in Treasuries

"This is an easy proposition to understand. Short-term interest rates are as close to zero as you can get, and the yield on the 30-year Treasury Bond is 3.5%.

"It has been in steady decline since 1982, as the hegemony of financial assets grew ever stronger, and the risk premium on them was steadily eroded.

"Now we are in a new era. While short-term interest rates will remain low for at least another year because the Fed can control them, long-term interest rates are set by the market based on market risk and inflation expectations.

"Long-term rates can conceivably fall a bit more in the short-term if the economy remains weak (as it certainly will), and if market panic makes investors flee to Treasures of all types.

"Given the all-time lows at which yields are now, it would not take much of a rise in overall prices to push long-term rates up, and the prices on long-term Treasury Bonds down. It is just a matter of time.

"The UltraShort 20+ Year Treasury ProShares are structured to mimic the reverse of long-term Treasury Bond prices, at twice the velocity. In other words, they rise twice as fast as Treasury Bond prices fall, or, put another way, twice as fast as Treasury Bond yields rise. The prices of bonds move inverse to their yields.

"I particularly like this anti-Treasury investment because you have two ways to win, and only one way to lose, and even that is temporary. If the market recovers, money will flow out of Treasuries into riskier assets, making bond prices fall.

"And if things don't improve, the Fed must keep throwing money at our financial problems. At some point, bond buyers will demur from accepting the increasingly worth-less paper, and bids on bonds will fall.

"The 'losing' part here is only short-term. Panic in the markets will create short-term demand for T-Bonds, but that has a limited life span. The only other short-term negative force is the threat of the Fed buying long-term bonds to keep rates low.

"But that too can only produce a short-term knee-jerk reaction. The Fed would have to buy the bonds by issuing more dilutive paper. Sooner or later the sleight-of-hand becomes so clumsy that even the most naive buyers must see.

"The Japanese and Chinese, who are the biggest buyers of our Treasuries, are hardly naive. In the past they had to buy these bonds because they had nothing better to do with the huge dollar reserves they got from our consumer spending on their goods. That flow is now a trickle, and the impetus to buy T-Bonds has dried up."

Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.