The list of high-profile investors and economists warning of a potential bond market collapse is getting longer by the week. Fortunately, for investors looking to hedge their bullish bets or profit off of a bursting bond bubble, there are several investment funds designed to rise as bond prices fall.
Last week, investor and CEO of DoubleLine Capital Jeffrey Gundlach became the latest bond guru to warn investors about an potential spike in interest rates that could cripple the bond market.
According to Gundlach, DoubleLine has been dialing back exposure to high-yield corporate bonds and emerging market debt.
[See: The 9 Best Municipal Bond Funds for Tax-Free Income.]
“When the copper-gold ratio is rising it’s incredibly suggestive that something is going on that might be a little inflationary,” Gundlach says. “It suggests to me yields are going to break out to the upside.”
The copper-gold ratio hit its highest level of the year last week.
Bond prices and bond yields have an inverse relationship, so rising yields means falling bond values for investors.
Gundlach’s comments come just weeks after former Federal Reserve Chairman Alan Greenspan said the bond market is on the precipice of a major collapse.
“The current level of interest rates is abnormally low, and there’s only one direction in which they can go. And when they start, they will be rather rapid,” Greenspan said.
One of the most popular ways for investors to bet against long-term U.S. Treasury bonds is the ProShares Short 20+ Year Treasury Exchange-Traded Fund (ticker: TBF), which is structured to rise in value as bond prices fall.
Gundlach specifically mentions high-yield or “junk” bonds as particularly risky. The ProShares Trust ETF ( SJB) is designed to deliver inverse returns to an index comprised of high-yield bonds.
[See: 7 ETFs for a Solid Portfolio Defense.]
While there are no major ETFs that offer inverse exposure to emerging market bonds, both Greenspan and Gundlach warned that rising interest rates will negatively impact stock prices as well. Investors wishing to place bearish bets on the U.S. stock market should consider the ProShares Short S&P 500 ETF ( SH), while those looking to bet on weakness in emerging markets can buy the ProShares Short MSCI Emerging Market ETF ( EUM).
Long-term investors should understand that many of these inverse ETFs hold futures contracts, stock options and other derivatives that are subject to time value decay. These products leave the ETFs susceptible to contango, which can severely erode their returns if held over an extended period of time.
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How To Bet On A Bond Market Collapse originally appeared on usnews.com
