The Great Bond Bubble 6/25/12

Exchange Traded bond funds have been in a bubble as the Feds have kept interest rates low to spur growth in the economy. By the time this is all over, it will be another gigantic bubble, no different than the Dutch tulip or housing bubble. So how can I profit from the bursting of the bubble?

Firstly, the simplest way to see how much the bubble has grown is to look at the rising prices of TLT which is the iShares Barclay’s 20 Year Treasury Bond Fund. TLT has climbed from a value of $91 to $126 in two years. Another bond fund, iShares TIP bond fund has climbed from $107 to $121 in the same time period. Clearly bonds have risen much faster than many stock funds and this rise is unsustainable. Flight to safety from international stock funds has inflated our bond funds; combined with the extraordinarily low interest rates that we currently enjoy for borrowing money. So how do I make money when this bubble bursts?

 

One recommendation is to put money back into stock funds as they are usually contrary to bond funds. However my thinking is a little different.  I think it would be better to simply put money into TBF, which is the Pro Shares Short bond fund. TBF behaves opposite to the bond funds and from the attached chart; we can see how far it has dropped in the last couple of years. I would only put money into TBF using timing systems and not based on assumed fundamentals. Those that felt interest rates are low and it is time to put money into TBF would have seen their monies shrink from $45 to $29 in the last two yeqars, quite a significant drop. It is far better to use trading systems to time those entries and take advantage of the rise when the bond market bubble bursts. I think one has to keep in mind that bubbles can last a long time, and one would need to be patient and wait for major turns before inserting too much money into TBF, even with timed systems.

I missed out and lost money on my home value when the housing bubble burst and even though I thought of hedging my home value, I did not. This time I will be ready for the next bubble bursting which I believe could be the bond bubble.