Is it time to short Treasury bonds?

What can we see from the following three figures?

Figure 1. 10 year treasury rate

Figure 2. The yields of 5 and 30 year treasury bonds vs S&P500
Where ^FVX is Treasury Yield 5 Years; ^TYX is Treasury Yield 30 Years and ^GSPC is S&P 500 yield.

Figure 3. Bond prices reflected in ETF prices (TLT and IEF)
Where TLT: iShares Barclays 20+ Yr Treas.Bond; and IEF: iShares Barclays 7-10 Year Trasry Bnd Fd

It is amazing to discover that the yields of treasury bonds are at historically low; conversely, the bond prices (e.g. TLT and IEF) are historically high. Stock prices (S&P) are rising because the economy is proving to be somewhat stronger than expected. However, treasury yields are very low given the strength of the economy.

Next, let us look at the inflation rate,

Figure 4. US Inflation rate based on 12-month change in CPI

The inflation is low, but not non-existence. As a matter of fact, it is rising for the past one year, and it is now close to the mean value for the past decade (2.93%). Given the extraordinary US debt deficits and the upcoming Europe massive inflow of cashes printing, the inflation is very imminent. How come the treasury rate is even lower than the inflation rate?!

There are possibly two main reasons for why treasury yields are so low: (1) The Fed’s intervene to artificially keep the short-term rate near zero for the next two years; (2) the investors are very pessimistic on the equity market due to the threat of Eurozone sovereign crisis.

If the US economy is doing better and inflation accelerates as more printings in money, as we are seeing nowadays; and if Eurozone survives the sovereign woes within a reasonable time frame (let us say up to 2 years), the rate of Treasury rate is doomed to increase and the bond prices is doomed to drop significantly.

Investment strategies:

In my opinion, shorting bonds has the potential to produce big profits down the road, how can I do it? Here are the positions I am now looking into,

• Shorting treasury bonds
• shorting a bond ETF (e.g IEF, TLT)
• buying a buying a short bond ETF
• Buying a leveraged ETF (e.g. ProShares Ultra-short 7-10 year treasury ETF (PST))

I will post more content on this in my future posts.