3 ETFs to Dodge Damage From the Coming Bond Market Collapse

By Wall Street Wisdom:Just when you've finally gotten over the stock market crash from four years ago, there's a new threat that could potentially hit your portfolio. Even worse, it's in an area that many people think of as being safer than stocks: the bond market.We're on a collision course with the worst bond market collapse in decades and the warning signs are as clear as day. There's still time to dodge the damage - and even to profit - if you know what to look for.

Even though the overnight interest rate has been stuck near zero for 20 months, are there options available to the Federal Reserve or the U.S. Treasury to bring longer-term yields down further? I have been looking into this question with Cynthia Wu, an extremely talented UCSD graduate student. We present our findings in a new research paper, some of whose results I summarize here.

For the second straight Friday, it sure seems like no one wants to be holding Treasuries headed into the weekend. Last Friday, Treasuries went more or less straight down throughout the day. Today, after a brief spike on the deluge of economic data out this morning, bonds have turned in a repeat performance of last week. The chart below shows the last two weeks of trading in 30-year U.S. Treasury bond futures, with the Friday sessions circled:

Recently, S&P downgraded US Treasury debt. Politicians are angry over the debt downgrade. They can't prosecute S&P for "downgrading US Treasury debt". Instead, they're prosecuting S&P for ratings on subprime mortgage bonds during the housing bubble. That's a pretty standard trick. State police want to nail you for X, but instead they prosecute you for Y.

Bill King, Chicago-based author of insightful The King Report, said the following about the sell-off in the government bond market:

We recently showed 220 years of US Treasury bond yield history but all too often, the average investor is unfortunately unaware of the relationship between bond yields (interesting on a relative-value perspective) and bond prices (the thing that matters for your portfolio's returns).

  The US Government and the US Federal Reserve downplay the threat of inflation. There are two primary reasons for this: