Is the Fabled "Short Bonds" Mega-Trade Upon Us?

The "short Treasuries" trade has been bandied about on Wall Street for years as consensus has been growing that the market for U.S. debt is becoming a massive bubble. Unfortunately for some investors, yields have continued to trend lower amid a 25 year bull market in bond prices which has been exacerbated in the wake of the 2008 financial crisis. Buying from the Federal Reserve along with safe-haven flows from around the globe have pushed prices perpetually skyward in recent years. On a fundamental basis, it is difficult to justify current levels given the United States' deep fiscal problems, a long-term downtrend in the U.S. Dollar and potential global inflationary fears. Structural market dynamics, however, have left many bond bears poorer for their efforts to call (and trade) a top. Nevertheless, arguments abound for a "bond bubble," and many heavy hitting investors believe that the Treasury market has become grossly distorted. Bond buying from the Federal Reserve as part of its "quantitative easing" programs along with a global premium on safety and liquidity has triggered significant flows into U.S. debt amid recent years' volatile market conditions. The end of this cycle will likely be predictable, although the timing has been very tricky. Inflationary fears amid a strengthening global economy could catalyze a massive re-allocation out of bonds and into risk assets such as stocks and commodities In a recent

, Chicago-based trader Rich Ilczyszyn argues that "the Mother of all shorts has begun" and now is the time to bet aggressively against the U.S. bond market. He says, "since 2008, money has fled into safe havens," such as Treasuries and gold and that this has been "a massive, massive trade." As global investors begin to unwind their positions in Treasuries, it could cause significant disruption in the market for years to come. "If that is the case, it's going to be Niagara Falls through a garden hose on this particular trade," Ilczyszyn says about what's expected to a be disorderly reallocation from bonds to stocks. "You may see another leg up in the equities and a massive decline in the Treasuries." As the stock market has staged a furious rally to begin 2012, a potential major inflection point may have taken place in bonds. The yield on the 10-Year Note is now sitting at 2.39% after previously trading below 2%. If this is the beginning of the fabled "trade of a lifetime" and a precursor to a semi-crash in U.S. Treasury prices, traders should find opportunity in this market for years to come. On Monday, the iShares Barclays 20+ Year Treasury Bond ETF

fell another 1.19% to $110.10, which is a fairly large move for this particular ETF. Traders looking for a simple instrument to use to bet against Treasury prices may want to buy the ProShares UltraShort 20+ Year Treasury Bond ETF

which added 2.30% on Monday to $21.31. Over the last month, the TBT is up 11% and on the three month chart it has gained nearly 22%. If famed investors such as Jim Rogers, who founded the ultra-successful Quantum Fund with George Soros, are to be believed, the short Treasuries train may just be leaving the station with plenty more profits ahead. Rogers has been vocal about his

amid a "bubble" in the asset class. Another well-known investor who has publicly voiced his disdain for bonds is none other than Warren Buffett. In a recent

, the Oracle of Omaha borrowed a line from former Wall Streeter Shelby Cullom Davis to describe the situation: "Bonds promoted as offering risk-free returns are now priced to deliver return-free risk." At the very least, investors should pay attention to the recent jump in yields while noting that there is the potential for a much more powerful sell-off in the Treasury market. Aggressive investors who share the "trade of a lifetime" sentiment of some on Wall Street, may want to begin building bearish Treasury positions as yields continue to move up.