Taleb is shorting US Treasury bonds

Nassim Taleb, author of "The Black Swan", who predicted the credit bubble and financial crisis in 2007, says the US Treasury bond market is the next to burst. I couldn't agree more, and have been blogging about this for over a year. Who in their right mind would lend money to a broke US government, tying their money up for 30 years, while earning less than 5% interest for the privilege of taking on that risk?

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3E4uC5VIFeo&pos=5

While it's not convenient or prudent for retail investors short US Treasuries in the futures market, the TBT ETF is a possible trade on rising long-dated bond yields. But TBT is not an efficient proxy for shorting Treasury bonds, and tends to underperform in the long-term.

However, home borrowers should lock in a low fixed-rate mortgage to protect themselves from rising yields in the 10-year Treasury bond.

See sidebar for disclaimers.

Disclosure: no position in TBT.

Bubble in Treasury bond market?

Although the TBT exchange-traded fund (ETF) is not an efficient proxy for rising long-dated US Treasury bond yields, it is one of few investment vehicles available to retail investors.

http://moneynews.com/Headline/Experts-GetOut-Bonds-Bubble/2009/12/31/id/345127

TBT is a leveraged bet against the long Treasury ETF iShares Barclays 20+ Year Treasury Bond (TLT). It attempts to double the inverse of the returns of TLT, using options and futures contracts. Theoretically, if TLT rises 1%, TBT should decline 2%. Likewise, if TLT declines 1%, TBT should rise 2%. In essence, if 20+ Year Treasury Bond yields rise by a certain amount, the price of TBT should rise twice that amount.

The reason why TBT underperforms its intended goal of achieving these returns is due to performance drag from the derivative contracts of the UltraShort fund being rebalanced every day. This causes isotopic decay, so the ETF never reaches previous highs--even if the directional bet is correct.

The best way to profit from rising yields in long-dated US Treasury bonds it to short sell them in the futures market, which is unfeasible for most retail investors, due to volatility risk and excessive leverage.

In summary, the TBT ETF trade will be profitable short- and mid-term if long-dated bond yields increase, but it won't be as profitable as expected long-term. Of course, the best way to protect yourself from rising interest rates is to lock in historically low interest rates with a fixed-rate mortgage.

Disclosure: long TBT shares.