The yield on 10-year U.S. Treasury notes fell to the lowest level ever as fears over eurozone debt issues sent money into the safety of United States government bonds. A bond auction by the Spanish government, that did not go well, and a spike in the yield on their bonds saw money rotate out of European-related debt and into U.S.-issued bonds.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Treasury Exchange-Traded Funds
The iShares Barclays 7-10 Year Treasury Bond ETF (ARCA:IEF) is only up 3% in 2012, not including dividends, but is trading at the best level ever. The small gain year-to-date is currently lagging that of the SPDR S&P 500 ETF (ARCA:SPY), however that does not take into consideration the much lower risk and volatility of IEF.

Investors who believe the European situation will continue to escalate and that the "risk off" trade is the choice for big money, should consider IEF or its peers as the end result will be lower rates and higher prices for bonds. The iShares Barclays 20+ Year Treasury Bond ETF (ARCA:TLT), which invests in longer dated bonds, is up 5.6% in 2012 and is also at an all-time high. Typically, the longer to maturity for bonds the higher the beta. So another big move down in yields should help TLT outperform IEF. That being said, if the price of bonds fall and yields rise, TLT will likely take a bigger loss than IEF.

SEE: Top 4 Strategies For Managing A Bond Portfolio

Betting on Higher Yields
There is a group of investors who believe Treasury yields are set to bounce, and when they do it will be a significant and violent rally. I have to agree with that camp, the problem with the theory is that timing is difficult to predict. Will the 10-year fall to 1.5% before yields rally? Or will the rally begin in the coming weeks?

When investors are ready to bet on the bursting of the U.S. Treasury bubble, there are a few options to profit. The ProShares Short 20+ Year Treasury ETF (ARCA:TBF) returns the daily inverse of the underlying index of long-date U.S. bonds. The majority of the bonds in the index are slated to mature between 2039 and 2041.

Aggressive investors looking to make a leveraged bet could consider the ProShares UltraShort 20+ Year Treasury ETF (ARCA:TBT). The exchange-traded fund (ETF) tracks the same underlying index, except it returns two times the inverse of the daily performance. For example, if the index falls by 1%, the ETF in theory should rise 2% on that given day.

Because the leveraged ETFs are reset every trading day, the long-term holding of such a position is not recommended for the majority of investors. These types of products are better suited for skilled traders who know the key strategies of avoiding negative bond returns.

SEE: 10 Tips For The Successful Long-Term Investor

The Bottom Line
It is always risky to bet against a trend that requires picking a bottom. In my years of investing, I have experienced the losses associated with trying to find the absolute low point of a downtrend. The better bet is to wait for a bottom to form, and once the trend has confirmed it is over and the bubble bursts, then begin to initiate a position in the direction of the new trend. With that being said, the trend points to lower yields and higher bond prices in the near future.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: First Trust Dorsey Wright Focus 5

    Take a closer look at the First Trust Dorsey Wright Focus 5 ETF, a unique and innovative fund of funds based on momentum and relative strength.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  3. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  4. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  5. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  6. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  8. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  9. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!